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Published: 3/6/2001

Sensing a bear, more investors flee the market

The stock market has caused a lot of pain for investors in the last year - since the Nasdaq index closed over 5,000 for the first time last March 9 and hit its all-time high of 5,048.62 on March 10.

Many investors are simply bailing out, and who could blame them?

The selective bear market of 2000-2001 is starting to look a lot like the honest-to-goodness bear market of 1973-74. The only difference is that the Dow Jones industrial average and the Standard & Poor's 500-stock average stubbornly refuse to drop the full 20 percent from their peaks and certifiably make for a bear market.

But nobody's kidding anybody. The bear has been breathing on our necks for months.

By the end of February, more than 70 percent of Nasdaq stocks were down from early March a year ago, and a third of the 3,800 Nasdaq stocks were down 50 to 90 percent.

The larger marketbasket of 6,300 stocks from all exchanges fared not much better - 59 percent were down, and 26 percent were down 50 to 90 percent. More than 7 percent were down more than 90 percent, and 25 percent were down anywhere from 10 to 50 percent.

From the start of the year, investors have been pulling in their horns.

In January, for example, they put $25 billion of new cash into stock mutual funds, 45 percent less than the $44 million invested in the same month a year earlier. Meanwhile, new money flowing into money-market accounts more than doubled, from $42 billion to $103 billion.

But what seems to be bad for the stock market could ultimately be its salvation. Money can be put to only so many uses - and almost all those uses are good for the stock market sooner or later.

If investors decide to put their money into bonds for now, that's good: The influx of money would help keep interest rates low, which would bode well for a stock-market resurgence.

If they decide to spend some of their money rather than invest it, that's good, too. Ordinarily, spending could cause problems, by kicking up inflation. But with the nation's gross domestic product sputtering along at a zero-growth rate, spending could provide a much-needed boost. So far, housing construction has held up surprisingly well, even as other big-ticket purchases, like autos, are declining.

Savings certainly would be a good use for many billions of dollars right now - especially because Americans' savings rate has hit rock bottom in recent years. Money saved now is money to be spent or invested later.

But, no matter where the money hides temporarily, it eventually will come back into the stock market. It's the old greed factor: Investors eventually tire of single-digit returns, especially low single digits, and will be ready to take more risk again.

No risk, no reward. No pain, no gain.

We've certainly felt the pain. Maybe our money, safely parked elsewhere for a while, eventually will boost the stock market again - even if the gains are nowhere close to the ones we took for granted in the late 1990s.

Homer Brickey is The Blade's senior business writer. E-mail him at homerbrickey@theblade.com.



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