New York -- Which script rules the current stock market -- the "Last Action Hero" or "Apocalypse Now"?
From the start of this bull market in October 1990, individual investors have been stuffing their cash into stock-owning mutual funds. Thanks to their passionate enthusiasm, fund managers have picked up $82.1 billion so far this year, compared with $61.7 billion for the same period of 1992.
Under the "Action Hero" scenario, this devotion to long-term growth should help stabilize the market when stocks turn down. Interest rates are too low to win investors back to bank CDs. Their experience shows that falling markets rise again.
The "Apocalypse" script, on the other hand, sees this new money as stupid and ready to jump. Pessimists think that today's new investors haven't a clue how markets work. They seek higher returns but aren't prepared for the shock of a temporary loss. When stocks turn down, they'll run like rats -- forcing fund managers to dump stocks in order to meet huge demands for cash. "You're setting up for one of the greatest panics in history," predicts market analyst Walter Stone of Boston, who has been expecting a major market collapse ever since 1988.
Without doubt, a stock market this high is vulnerable to a change in trend. All year, some stocks have risen while others declined, producing little in net new gains. Any bad economic news -- like an unexpectedly tough tax bill or profits trending lower than expected -- could send stocks into a long faint.
But occasional bad markets are the normal spice (or maybe the spinach) of investment life. The last Big One hit in January 1973 and carried Standard & Poor's 500-stock index down 48.2 percent over the next debilitating 22 months.
The question being debated today is whether the mutual-fund mania, rather than any economic event, might cause a similar decline.
Count me a no vote. This isn't tulip-bulb madness or a South Sea Bubble. Savers are moving into stocks as a sensible alternative to 2.5 percent bank interest rates. Here are reasons for them not to return:
* When investment sentiment sours, the level of mutual-fund share redemption actually declines, says Avi Nachmany, an analyst with Strategic Insights in New York. People don't like to realize losses, he says. They wait for stocks to rise again before they start taking money out. Many other buyers won't move at all. Once into stocks, Nachmany says, "a great majority of investors are not responsive to changes in market conditions."
* Mutual-fund managers haven't invested all of the cash that's been flooding in. Cash levels at equity funds stood at 10.3 percent of assets at the end of April, the highest since February 1991. "I don't see any evidence that mutual funds are trying to push the market to abnormally high levels," Norman Fosback, editor of the Mutual Fund Forecaster in Fort Lauderdale, Fla., said.
* Mutual funds are so liquid that most can handle huge redemptions from their cash reserves. If giant stockholders want out, funds might give them securities rather than cash, saving the funds from having to sell too much of a single stock.
Some of the newer and smaller funds might not survive a long bear market, but their assets would not blow away. They'd probably be bought by a larger fund with no inconvenience to shareholders.
Greater than the risk of share holder panic is the very real chance of fund-manager panic. "Any mutual-fund manager under today has no idea what a real downside is like," says bearish Charles Allmon, editor of the newsletter, Growth Stock Outlook, of Chevy Chase, Md. Young managers think that the 1987 crash taught them all they need to know about market drops. But that one was over before they had to make any decisions. They have yet to be tested in a frightening two-year decline. It may turn out that investors are the steadfast ones while the managers get carted off.