The stock market managed to avoid a collapse Thursday on news of Iraq's takeover of Kuwait. But that probably shouldn't be very comforting. Conversations with big money managers across the nation suggest that a deep-seated gloom is setting in, and many of those investors are approaching decision time. Many could opt to bail out of stocks in the next few weeks.
"We've done a lot of agonizing over the last couple of weeks," says Bill D'Alonzo, who manages the $220-million Brandywine growth-stock mutual fund in Wilmington, Del. "We're in a tough decision-making period. Is the market still vulnerable, or are things already pretty well discounted?"
That's always the stock investor's dilemma, of course--the question of how much potential bad news already is built into stock prices. But for many big investors, the Iraqi move suggests nothing but trouble for stocks short term:
As oil prices rise, so will inflation. That could make it tougher for the Federal Reserve to bring interest rates down further to help the weak economy. Inflation has historically been a bull-market killer.
Even if oil prices stay relatively level from here, many investors fear that the added pressure of oil's latest rise will further slow the economies of the United States and other key industrialized nations, including Japan, Taiwan and West Germany, all big oil importers.
Some of the major exporters of natural resources, such as Australia and Canada, could be helped by higher oil prices. But overall, the Iraqi move leaves more institutional investors questioning whether it's time to prepare for a sharp decline in stock prices--such as the declines that followed the 1973 and 1979 oil-inflation shocks.
The 1973-74 stock market plunge, in the wake of the Arab oil embargo, saw the Dow Jones industrial average fall to about 600 from 1,000, a 40% drop. The 1980 market slump, following panic oil buying after the Iranian revolution, saw the Dow fall to about 750 from 900, a 17% loss.
So far, the Dow has fallen only 4.5% from its peak of 2,999.75 on July 17 to 2,864.60 on Thursday. The broader market has already suffered much worse: The NASDAQ over-the-counter composite stock index has lost 9% from its July high.
"This is potentially a terribly depressive thing that the Iraqis have done," said Ron Sloan, chief investment officer for $2-billion Siebel Capital Management in Larkspur, Calif. He admits that he has been bearish since last fall, missing the spring rally. But Sloan says that, looking at the economy and inflation outlook, there is far less to be optimistic about now than in 1989. Yet many investors refuse to buy the bear scenario, he notes.
The Dow's 34.66-point fall Thursday was remarkable for its restraint, Sloan says. His fear is that many money managers in the business today are too young to remember previous bear markets and so can't fathom the selling that could occur--not in routs such as the October, 1987, and October, 1989, crashes, but in sustained bearish trends that could last for months.
"There's an awful lot of money being managed by people who have no real-life experience with those bad times," Sloan says.
James Kennedy, research chief at stock mutual fund giant T. Rowe Price Associates in Baltimore, agrees that the risks now in the economy--and therefore the risk to corporate profits, which ultimately underpin stock prices--are greater than many investors want to admit. "I think the market is asleep. It baffles me," he says. "It seems like it's time now for oil and gold stocks, but the rest of the market is shaky."
What's more, the potential for a wider war in the Mideast--at worst, a confrontation between U.S. and Iraqi troops--is a risk that the market can't even begin to size up. To assume that stocks already reflect the worst "is very premature thinking," Sloan says. "People want to discount the valley ahead, and they don't even have a glimpse of the other side yet."
Still, money managers who pride themselves on their stock-picking ability say they aren't willing to abandon their disciplines because of short-term turbulence. Fred Applegate, whose Nicholas-Applegate Capital Management in San Diego is one of the nation's most successful growth-stock pickers, says he can't justify bailing out of such stocks as computer-chip maker Intel, retailers Home Depot and Toys R Us, and motorcycle firm Harley-Davidson.
"We've been through recessions and we've been through high-inflation times," Applegate says. "We don't get into trying to forecast those things, because that (forecasting) has had such a low success rate." Instead of trying to time the market, the firm will stick to its guns, Applegate says--owning the best companies it can find and remaining confident that the stocks will come back to life as soon as current market troubles pass.
Individual investors have pretty much the same decision to make: Are you confident enough in the stocks you own to wait out what could be a severe plunge ahead? Good companies survived 1974, and they'll certainly survive whatever's ahead as well.
Robert Bacarella, who runs $130-million Monetta Financial Services in Wheaton, Ill., says he bought into the market decline Thursday, adding to his holdings of such stocks as L.A. Gear, American Greetings and women's shoe retailer Edison Bros.
But he admits that, for the most part, "My indicators are still bearish." There are many other stocks he'd like to buy, Bacarella says--but not until they fall another 10% or more.
That kind of thinking, if it indeed is growing more prevalent among big investors worldwide, could assure that the stock market is going to be a very depressing place for the near term.
Brandywine's D'Alonzo, still wrestling with the idea of trimming his stock holdings, notes that history suggests that he make the move. "Over the past 16 years, there were only two times when we went heavily into cash," he says. "Those times were 1974 and 1979"--the last oil shocks.
"Well, here we are again," he says.
READY FOR A BLOWOFF? Most stock markets worldwide fell sharply Thursday after the Iraqi invasion of Kuwait. But some markets benefited from expectations of higher prices for some natural resources the countries export. How key indexes performed:
Thurs. Point Pct. Country/stock index close change chg. Australia/All Ordin. 1,616.80 +29.90 +1.9% Philippines/composite 937.99 +2.47 +0.3% U.S./Dow industrials 2,864.60 -34.66 -1.2% W. Germany/DAX 1,869.38 -23.51 -1.2% Hong Kong/Hang Seng 3,415.18 -53.46 -1.5% U.K./FTSE 100 2,305.00 -34.00 -1.5% Japan/Nikkei 30,245.18 -592.81 -1.9% Taiwan/weighted index 5,450.42 -320.86 -5.5%