Like Harry Potter peering into the mirror of Erised, investors examining this wacky stock market can see exactly what they want to see. The fumbled election? Terrible news, say the grim. No clear winner; no telling what's in store. Wonderful news, say the glib. So much confusion means so much gridlock in Congress that we'll probably not get any dumb spending bills or tax cuts. Read: The surplus is safe.
It's important to look beyond the election, though, because its bizarreness is merely masking a market that is already more confused than a Palm Beach voter. Equally ambiguous are readings of the economy, dollar and investor psychology.
Take the economy. Everyone knows it's slowing and that corporate profits will fade in tandem. Bad news for stocks, right? But wait. With inflation tame, the Federal Reserve has room to lower interest rates, prevent a recession and kick off another bounteous period of accelerating growth.
The strong dollar? It diminishes the value of foreign earnings and makes U.S. goods less attractive abroad, hurting multinational companies like Gillette and Goodyear. But it's also luring tons of foreign investment to the U.S., putting a floor under stock and bond prices.
As for investor psychology, it has turned circus-freak ugly. Not a serious buyer in sight. Cash is piling up in money funds, which stand at a record $1.8 trillion. Cash at stock mutual funds equals 5.3% of assets, up from 4% in March. Yet to bulls, these stockpiles represent buying power ready to push prices higher. "I've never seen so many people on Wall Street talking to so many other people on Wall Street trying to figure out what's happening," confesses John Manley, a market strategist at Salomon Smith Barney.
And these are the professionals. As you've probably heard by now, the stock market, like some dim-witted clerk, applies a generous markdown to what it can't figure out. Thus the NASDAQ index fell 12% during election week and plunged again last Monday, crashing below 3000. It bounced back on Tuesday but was dishearteningly choppy the rest of the week. The Dow has been on its own treacherous sawtooth course, breaking the will of many who had expected a year-end rally to take shape by now.
The rally may yet come. As noted, the bulls can make a case, one largely hinged on lower interest rates. But for now, rates are steady, and the bears are in control. Long-term investors may want to start building positions. Don't be surprised, though, if tech bellwethers sink more before a sustained recovery. That's especially true of those with rich valuations like Cisco and fiber-optics darlings Corning and JDS Uniphase.
Forget the profitless dotcoms. Better to hunt for beaten-up telecom stocks like Verizon and WorldCom, which are now popping up on the screens of dyed-in-the-wool value managers. The tech tortured can seek solace among energy services, banks and insurers, consumer staples and health care. Stay diversified and somewhat conservative. An all-purpose growth-and-income fund might be just the thing. Bonds are also a decent place to hide while the market is seeing a dark cloud behind every silver lining.