Market's Resilience a Tribute To Broader American Values.

IN some ways e stock market's October rally has been more remarkable than its staggering Sep ember drop.

After the terrorist massacres Sept. 11, there were plenty of reasons for stocks to swoon. And so the did, suffering their largest. weekly decline sin e the Great Depression.

Yet by mid-October, just three trading weeks later, the market had recouped practically all those post-attack losses - with few obvious developments to explain its revived optimism.

What happened? When stocks do the opposite of what we would expect of them, it's time to pay attention. They might be telling us something.

The news is still daunting. In economic terms, we are just beginning to get a measure of the damage. Retail sales in September took their sharpest drop in 10 years.

"Secondary negative effects from the attacks on economic conditions are now under way, with job and production cuts rippling out," said lice Lee in a Goldman, Sachs & Co. commentary. "There is deep concern that consumer demand will continue to weaken into early 2002, as higher unemployment takes its toll."

Beyond economics, nobody knows where the military and political story will take us. The same newscasts that reported the market's rise to post-Sept. 11 highs then led with a warning from the Federal Bureau of Investigation to be on guard against possible new terrorist attacks. Then it was time to learn everything we never wanted to know about anthrax.

Small wonder that the stock market has backed off a bit. As investors sort through risks most people scarcely considered before, it would hardly be surprising to see more spells of hesitancy and doubt.

Still, the show of resilience remains to be explained - and admired, if you'd care to join me. One way to think about it is to ask ourselves a couple of questions that investors have to be contemplating: 1) Peering as far ahead into the future as we possibly can, what is the likely outcome of this conflict? 2) In the meantime, what have we learned about ourselves?

On the first question, it may seem crude to speak of handicapping the war the way one would a sports event or an election. That, however, is precisely what investors must do as they try to sort out events that will influence the state of the U.S. and global economies.

To the extent that such consideration has already occurred, the market rally suggests a growing confidence that the U.S. and its allies will prevail. Exactly how remains to be seen. Quite often, though, the market paints its outlook in broad strokes and fills in the details later.

Thus, hopes of a positive outcome can gain a foothold even while grave dangers persist. Recall the old French investment proverb, "Buy on the cannons, sell on the trumpets."

Optimism can also be inspired by what we have learned so far about ourselves. As horrified and grieved as we are by the massacres, we are justified in being heartened by our collective response to date.

Beneath the many issues with which we were grappling before the terrorists struck - and which have by no means gone away - people in this country have rediscovered an abiding common interest. This goes far deeper than my-country-right-or-wrong jingoism. It takes us back to a system of authentic values rooted in phrases like "land of the free."

The "postmodern" proposition, popular in some academic circles, that the U.S. was just another self-seeking clique, motivated by values no better or stronger than anybody else's, has been exposed as the claptrap it always was. But then, what did intellectuals ever know?

In its economic and political success, America is not just lucky; the principles we live by, including individual liberty, free markets and a free, open and diverse society, have everything to do with it.

The stock market, messy and contentious place that it is, serves as a good mechanism to register what's happened so far. As the campaign against terrorism proceeds, expect it to keep filing timely reports.

Chet Currier is a columnist with Bloomberg News.

Tepid Market Chills 'Fully Invested' Push

Notice how you don't hear the words "fully invested" so often in investing conversations any more.

The phrase was a bull-market rallying cry in. the 1990s, when legions of mutual fund managers proclaimed that keeping all their assets in stocks was their constant investment policy. No sudden shifts to bonds or cash reserves for them.

In case anybody needed a convincer regarding the wisdom of this approach, there was the story of Jeff Vinik at the Fidelity Magellan: Fund, a top manager who departed that job in 1996 after an ill-timed move into bonds.

Well, that was then, this is a new century. It has begun with a 19-month bear market that has proved especially tough on growth stock funds.

Few managers have renounced the fully invested orthodoxy The evidence shows many still; follow it, thot gh much less vocally than before.

The liquid-asset ratio of all stock funds, or the percentage of their assets held in money-market reserves, hit a 29-year-low of 4 percent in March 2000, according to Investment Company Institute data. The bull market topped out that very month.

The ratio rose to 6.5 percent by November. But at last report, in August 2001, it was back down to 5.4 percent. That's nowhere near the 10 percent to 12 percent levels that were common a decade ago.

Still, to judge from the ICI data, the typical manager industry wide hasn't made any big move to cash. Whether this counts as positive or negative news depends on your point of view.

On the plus side, it suggests managers learned well the pitfalls of trying to time the markets, and have resisted any pressure to recant. On the negative side, it provides no evidence of the "capitulation" that analysts who follow investor sentiment look for as a sign of a market bottom.

On balance, I'd say fund investors should approve. A stock-fund manager who loads up on cash risks missing the boat in the next market advance.