How far stocks plunge in a Wall Street "correction" may depend as much on people like Beatrice de Lalla as on Federal Reserve chairman Alan Greenspan.
The US stock market has risen to record highs in part on new money from small investors and the perception that the inflows will continue. A big question now is whether that money will stay put in bad times as well as good.
So far, it appears, American investors are hanging in there.
Ms. de Lalla, like many who own shares in stocks or mutual funds, knows the market is a volatile vortex of downs and ups.
"Tomorrow may be a big rally," she says philosophically after watching the Dow Jones industrial average shed 3 percent of its value in one day on Monday, July 15.
Indeed, the Dow began Tuesday on an up note, based on a tame inflation report for June. Then shares turned south again.
Some analysts believe US stocks are entering a pronounced slump.
"We could be seeing the beginning of a bear market," says Gene Jay Seagle, president of Tactics & Technics, a private forecasting firm in Weston, Conn. "The Dow's drop [July 15] below the 5,400-point level is serious. The Dow is a great forecasting mechanism, and what it now seems to be suggesting is that there is a recession coming."
Mr. Seagle sees a shift in investor strategy. "Before this last week, whenever there was a dip in the market, there was a lot of buying activity; now there's continued selling."
All major US stock index have plummeted downward in recent days, as investors worried about the possibility of an interest-rates hike by the Federal Reserve and lower-than-expected corporate profits. The Dow has tumbled more than 7 percent from its high May 22. The Nasdaq composite index is down 15 percent from its June 5 high.
But inside a Fidelity Investments branch office in Boston, where de Lalla was tapping computer keys to check on the stocks she owns, the overall atmosphere was one of calm, even as the Dow was turning in its fourth-biggest point drop ever.
One new investor, seated in a nearby cubicle, listened as a Fidelity representative gave steady-as-she-goes advice: Don't put all your eggs in one basket, and don't try to "time the market" by jumping in and out.
What's happening at Fidelity and hundreds of other mutual-fund offices around the United States, may hold the key to whether this downturn remains in the category of a market correction - when losses in stock values fall 5 to 15 percent - or expands into a full-blown bear market, often defined as a 20 percent or bigger drop.
To be sure, equity remains concentrated in a few hands, with 5 percent of Americans owning about three-fourths of all stock. But a rising class of small investors has emerged as an important factor in overall market psychology. Many newer investors have never weathered a bear market.
In the early '90s, individual investors - attracted by double-digit gains - have been plowing savings and pension dollars into mutual funds, largely through their 401(k) retirement plans.
In the period 1993-95 alone, Americans poured $377 billion into equity funds.
Yet a sizable portion of the money came from investors selling individual stock shares, according to anecdotal evidence and US government data. The reason? Individual investors, particularly in the huge baby-boom generation, have concluded that mutual funds provide greater safety than relying on individual stock holdings.
The perception of massive inflows into mutual funds, some argue, has been the very center of the current bull market, which began in 1990.
Will the mutual-fund-based center hold? No one knows for sure, but if it does and mutual fund investors refrain from redeeming shares, the broader market may hold, says Tim Schlindwein of Schlindwein Associates LLC, a Chicago investment counseling firm.
Some economists say that, even if mutual-fund investors don't panic, bigger investors might.
"The emperor has no clothes," says A. Gary Schilling, who publishes a Springfield, N.J. report. He refers to evidence that households, on balance, have been selling more stock than they are buying in mutual funds.
Still, in the past 14 market downturns from 1944 to the end of 1995, mutual-fund investors largely held on to their shares, according to the Investment Company Institute (ICI), a mutual-fund industry group in Washington. That even occurred after the major market crash of October 1987, when only 4.5 percent of equity-fund shares were redeemed.
Currently, 6.7 percent of all mutual fund assets are in liquid assets - valued at about $102 billion. These cash holdings, says an ICI spokesman, could be used to cover redemptions, should that be necessary.
Seagle, for his part, worries that the 6.7 percent position may not be enough, given the volatility of the market. Indeed, the amount is the lowest cash-to-assets level since the late 1970s. If portfolio managers did not have enough cash on hand for redemptions, they would then have to start selling stock out of their portfolios to raise cash - accelerating downward pressure on stocks.
A NUMBER of mutual-fund families are reporting some redemptions. No overall data as to the extent of the redemptions is yet available, says Carl Wittnebert, managing editor of Liquidity Trim Tabs in Santa Rosa, Calif., which tracks fund-flow patterns.
"We've called an end to the massive inflows on a number of occasions, and you know, the inflows have always come back right afterwards," Mr. Wittnebert laughs. "So I'm not prepared to say that the inflows are over."
In fact, he notes, the July 9 to 11 period saw sizeable inflows, notwithstanding some bad days on the stock market.
Based on data for two weeks of July, the inflow rate is running around $14 billion. Although down sharply from the first part of the year, with typical flows of more than $20 billion a month, this would be considered good by longer-range historical patterns, he says.
For now, de Lalla is holding onto her portfolio of blue-chip and utility shares. But she laments, "There's so much uncertainty."