JANE BRYANT QUINN
It’s conventional wisdom that baby boomers are pushing the market up. Supposedly, they’re pouring their money into stocks so that they can afford to retire someday. That’s why the Dow Jones Industrial Average reached the dizzy, 10,000 range.
But maybe conventional wisdom is wrong.
The boomers are indeed adding to their retirement funds, which are predominantly in stocks. A record 44 percent of American households now own stocks, either directly or indirectly, through pension and retirement accounts, says economist Edward Wolff of New York University.
But investors are also selling U.S. stocks to invest in other things (they’re raising their ownership of international stocks), or to buy big-ticket items like houses and cars. It will probably surprise you to learn that they’re taking more money out of the U.S. market than they’re putting in.
For several years, individuals who own stock directly have been selling more than they buy. In 1994, they sold a net of $160 billion. Last year, their net selling soared to $500 billion, according to the flow-of-funds report from the Federal Reserve.
They have added to the stocks they purchase in their 401(k)s, but not in large amounts. 401(k) plans purchased a net of just $20 billion in 1998, reports the Employee Benefit Research Institute in Washington, D.C. That’s far less than was sold in individual accounts.
Investors have been losing some of their passion for equity mutual funds, too. Last year, net purchases of U.S. stocks by mutual funds declined 13 percent. That’s the second annual decline in a row.
Traditional pension funds, which corporations run, aren’t affected by what individuals do. The fund manager’s only job is to see that retirees receive the monthly incomes they were promised. But pension funds have been selling stocks, too, to the tune of $58 billion last year, EBRI says.
If so many people are taking money off the table, what’s pushing up the market?
Flows of funds alone don’t dictate the market’s ups and downs. Opinions, expectations, numbers of orders all these and more affect the prices at which stocks are bought and sold. Prices are also affected by the supply of stocks, relative to demand.
You have probably assumed that the supply of stocks was going up, thanks to all the hot new issues coming to market. In fact, the supply has been declining for the past four years. In 1995, $3 billion worth of stock was removed from the market. In 1998, the supply shrank by $178 billion, according to the Federal Reserve.
Corporate mergers reduce the number of stocks, so do the many stock-buyback programs that are underway today. Corporations buy back their own shares with one goal in mind: to reduce the supply, which, with luck, should increase the price. (And guess what? The value of the executives’ stock options, and maybe their bonuses, depends on getting the stock price up. Buybacks are sometimes a quick and easy way of achieving that goal.)
Shrinking supplies of equities mean that whatever new money goes into the market is chasing fewer numbers of shares. That doesn’t guarantee higher share prices, but it helps.
Many of the most popular stocks are also being propelled by investors buying on margin (that means buying with money borrowed from stockbrokers). It’s usual for the amount of margin debt to rise when the market averages do. What’s unusual is the extent to which individual investors are going into hock, says Irwin Kellner, chief economist for CBS Inc.’s MarketWatch.com (http://cbs.marketwatch.com) and professor at Hofstra University in Hempstead, N.Y.
Margin debt currently amounts to more than 2 percent of all the disposable personal income in the United States. That’s double the previous record, set in 1987, just before the crash.
Such enthusiastic speculation may raise stock prices by more than the dollar amounts of the orders would suggest. That’s especially true for lower-priced stocks trading on the Nasdaq exchange.
One last point about stock prices: Although the market averages have been setting records, much of the rest of the market is in a funk. The majority of stocks are well off their peaks. In fact, never before has there been such a gap between the 30 stocks that make up the Dow and all the other stocks on the New York exchange.
The leading stocks on the Nasdaq exchange are also running way ahead of their troops.
So maybe that’s where the net sales of stocks are being felt: in the secondary stocks. With cash inflows shrinking, everything can’t keep going up.
Insurance scams
Most of the widely publicized lawsuits against insurance companies have involved the mis-selling of life insurance. But you can be bamboozled about health insurance, too.
Four lawsuits involving Globe Life and Accident Insurance and United American Insurance, both part of the Torchmark Corp. of Birmingham, Ala., have dredged up some testimony that should affect your approach to buying individual health insurance policies.
For example, if a new agent calls and wants to replace a policy you own, insist on a point-by-point comparison between the old policy and the new one. Don’t go by the first (and probably biased) comparison the agent brings.
Then check with your former agent. If the agent has retired, try to track him down. The new policy may be inferior benefiting the insurance company or new agent at your expense.
If you have a health problem and an agent offers you a low-cost policy (individual, not group), something is wrong. The policy won’t stay low-cost very long. What’s more, the insurer may find excuses to deny your claims.
Even if you’re in good health, the design of a low-cost policy may cause your premiums to soar a few years down the road.
Those are among the key issues in the current lawsuits. Torchmark (formerly Liberty National) settled one class-action suit in Alabama for around $55 million but continues to contest three other suits, in Mississippi, Georgia and Oklahoma.
The fights involve hospital/surgical policies, which pay fixed and limited amounts toward care. They’re generally bought by people who have no employee coverage and can’t afford comprehensive major medical insurance.
The customers’ cases are being handled by Dirk Hubbard of Klamann & Hubbard in Overland Park, Kan.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
