<SPECIAL FEATURE>
January 21, 1999

Eyes on the Press

Time
Don't Panic, But Say
Goodbye to Fantasy Island

Issue Date: September 14, 1998
Cover Headline: "Is the Boom Over?"

Time's lead story covered a lot of ground, not always successfully. (A typo near the top said the Dow had fallen 8% when the numbers tallied 18%.) However, it focused on two main questions. Should investors pull their money out of the market? And, does the market slide foretell a recession? To both, Time answered "No." Repeating the historical P/E argument, the article assumed that the stock market had "overheated" and that the sell-off was a "correction," or part of a "cyclical bear market in a secular bull market."

Though Time didn't quote leading market bulls, a nifty sidebar offered "A Little Perspective," showing how $10,000 invested in the S&P 500 on the eve of the 1987 market crash would have grown to $34,450, even after the pullback. The text added, "One of the worst things [investors] could do is let rising volatility and uncertainty drive them out of stock investments."

Time argued that a recession seemed unlikely, with the unemployment rate near a 28-year low, real wages rising, consumer confidence high, and interest rates falling. Still, it did offer an array of things to worry about, from the way a market decline could reduce consumer confidence or trigger layoffs to the potential for a "rising tide of global protectionism."

Daniel Kadlec's practical advice column rightly argued that "the worst is probably over" and that "this is a good time to start dollar-cost averaging" into stocks, for those with cash. Yet, Kadlec's comments suggested he operates under the mistaken view that a stock is likely overvalued when its P/E is higher than its growth rate -- a formula almost guaranteed to keep you from buying top quality companies. He's also something of a market timer, saying he had advised readers to raise cash earlier in the summer preparing for a drop (a good call, but not Foolish advice).

Picking up on the "Goodbye to Fantasy Island" subhead, Kadlec argued (wrongly, as it turns out) that the "era of 20% average annual returns from stocks is officially over" and that "the investment game has changed fundamentally over the past few weeks." Mostly what had changed were prices and psychology. And they both quickly changed back.

Next: Eyes on Money