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Don't forget the downside
Investors buoyed by the upward market turn should hope for the best, but plan for the worst.
July 7, 2003: 5:30 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. - I've been bullish of late. Honest, I have. So the market's rush upwards has felt good.

But every investor who is assuming -- hoping, praying, planning? -- things will go right should spend some time wondering what can go wrong. In other words, what is the worst-case scenario that could send the markets plunging again and be the pin-prick of the latest stock-market expansion?

Interest rates rise. In general, rising rates mean poorer opportunities in equities. That's why Wall Street typically cheers a Fed rate cut. Higher rates make it more difficult for companies to borrow and provide a safer alternative to investors.

While certainly a concern, this seems worth brushing off. Rates are at their lowest in decades and still would be if they rose a bit. Money-market accounts rising to 2 percent annual yields don't seem to be the greatest threat to the bull.

Investors are too confident. It's a generally accepted fact that the best times for gains are when everyone else is glum. That time isn't now. Individual investors are stepping back into market, an assertion proved out by recent reports at little-guy-oriented brokers like Ameritrade and Schwab.

A recent poll at TheStreet.com showed 40 percent of respondents are bullish, versus 29 percent bearish (and the rest neutral). The worst case here is that the masses are wrong.

Earnings don't disappoint, but aren't great either. The statistics du jour show few negative pre-announcements so far in the few days since the second quarter ended. Thomas McManus at Banc of America Securities counted 27 negative earnings revisions so far out of a total of 55. In the previous quarter's last week 50 companies dropped downward revisions, out of 77 in total that adjusted earnings forecasts.

But as Nelson Schwartz trenchantly argues in the current issue of Fortune, with valuations running it won't be good enough for earnings to not disappoint. They must beat expectations, and by a wide margin. If they don't, look out below.

Silliness spreads. Veterans of the last campaign generally get nervous when investors -- retail and professional alike -- act silly. Rational investors suggest sane markets. Goofy investors suggest bubble-like conditions.

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Almost a bull
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(Scary) signs of the times

For example, on Thursday, software maker Siebel Systems warned that its second-quarter results would be weaker than expected and that it will cut its work force. Again. The San Francisco Chronicle reported Friday that the cuts could number as many as 1,000 people.

Siebel stock? It's up 5.7 percent since the announcement on the assumption that Siebel will boost profits with the cost cuts. Isn't it obvious to anyone else that cutting a chunk of the employees suggests the business is getting smaller and therefore less profitable in the long term?

Political risk. Any number of things could wrong here. The famously short attention span of Wall Street is ignoring the goings-on in Iraq, where the situation hardly is under control. Terrorists are on the loose. The arguably improving situation in Israel remains a powder keg. It would take a catastrophic event to move this market. But we've seen catastrophes.

So, are you prepared for the worst case? Or are you betting only on the best case? Remember, it was just three long years ago that the worst-case scenario came true.


Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.