The Mideast Crisis May Be Fading as Factor in Investing
Does Saddam matter anymore?
As the Iraq-Kuwait crisis appears to be building to some kind of resolution--military or peaceful--more money managers are asking themselves whether they care either way. For many, the decision to move back into stocks and/or bonds now transcends whatever happens in the Mideast.
“Personally, I think we’re in a whole new period for the markets,” says Joe Perrone, chief investment officer for the $24.5-billion Texas Teachers Retirement System in Austin. A resolution in the Mideast, he says, “would be a temporary deal, either way.” Beyond that, “I look at the psychology of the markets, and I don’t think there’s any question that it’s going to get worse.”
John DeGroot, portfolio management chief at U.S. Trust of California in Los Angeles, also is far less concerned about the Mideast. “I think the Iraq situation has been discounted in the market,” whatever the outcome, he says.
Only a month or so ago, many investors were clinging to the belief that all Wall Street needed was an end to the Iraq-Kuwait stalemate. Either war or peace would have sparked a rally, many believed--because any resolution was better than continued uncertainty.
Now, more investors are looking deeper into the background of the economy and the markets, and they’re finding much more to worry about beyond Saddam Hussein. Even though it can be argued that Iraq triggered the recession that appears to be overtaking the economy, many investors now admit that all the Mideast crisis did was expose the weaknesses that had long been underlying the stock and bond markets.
“The bigger picture is that we’re in a global liquidity crisis,” says Martin Sass of M. D. Sass Investors in New York. “It’s the reversal of the debt-creation frenzy of the 1980s.” The Mideast crisis may be resolved in a week, he said, “but you don’t resolve the liquidity crisis so quickly.”
Significantly, institutional investors’ growing shift to these broader concerns is a strong hint that the bear market has much further to go, even if Saddam is overthrown soon. Elements of doubt have been planted in investors’ heads--worries about the value of long-term investments in the current world economic climate--and those doubts will take time to erase.
What’s also interesting, however, is how many big investors seem sure that the stock market low isn’t far off--while history and the investors’ own negative feelings suggest otherwise.
Echoing many of his peers, Charles Brandes of Brandes Investment Management in San Diego says he would become “an out-and-out bull” if the Dow industrial index falls to between 2,000 and 2,200, from 2,454.95 now.
At 2,200 or below, he says, there would be enough value in stocks to guarantee excellent profits over the long term.
Likewise, Sass believes, the market “is probably within 10% to 15%” of what will be at least its initial bottom. Having by now cut his aggressive accounts to just 60% stocks and 40% cash, he says, “I’m not selling anymore. Rather, I’m figuring when I’ll be buying into the market again.”
That reluctance to sell--or to buy--at current levels explains why the market has been mostly churning in recent weeks. Many investors want the market to go lower so they can buy, but they want someone else to drive it there. They feel as if they’ve sold enough already.
But if the economy is in fact just entering a recession, history suggests that the ultimate bottom for stocks is well in the distance. A study by Shearson Lehman Bros. of the eight postwar recessions shows that market bottoms typically aren’t reached until just three to five months before the end of a recession.
So if the current recession were to last until next June, the market probably wouldn’t reach its low until sometime between January and March.
Could that low be a mere 2,000 to 2,200 on the Dow, as many big investors believe? Perhaps. But some experts worry that the negative psychology is building to a point that could prove the 2,000-bottom group much too optimistic.
If the market is carried to 2,000, some say, the momentum at that point is likely to be strong enough to guarantee a fall to much lower depths.
Perrone, of the Texas Teachers fund, now has just 41% of the fund’s assets in stocks. But if the fund’s trustees became convinced that the economy was sinking far deeper than most experts expect, the fund could sell all the way down to 35% stocks, he says.
He doesn’t anticipate liquidating stocks to that degree, but he admits “I think it could happen. There’s no question they (fund trustees) are worried.”
In the case of private money managers, terrified clients may ultimately force liquidation, even if the managers believe that stocks are too cheap to sell. After all, no hired money manager can balk when a client simply says, “Enough.”
And if the bad news continues on the economy, the banking system, the dollar and other fronts, there is little question that the list of get-me-out clients will grow.
One portfolio manager remembers how on Oct. 19, 1987--the day of the crash--he and other managers were at the mercy of clients, who had set up meetings with the managers and simply demanded “let’s sell everything.”
Now, he says, “I think it’s going to happen again, because they’re starting to ask for those meetings again.”
WHEN WILL IT BE TIME TO BUY?
Assuming the economy is in a recession, many investors are wondering when the stock market will begin looking ahead to a recovery. In the eight recessions since World War II, the market typically bottomed three to five months before the recovery began.
Months Stock between market market bottom and Recession bottom recession’s end Nov., 1948-Oct., 1949 June,1949 four July, 1953-May, 1954 Sept., 1953 eight Aug., 1957-April, 1958 Dec., 1957 four April, 1960-Feb., 1961 Oct., 1960 four Dec., 1969-Nov., 1970 June, 1970 five Nov., 1973-March, 1975 Dec., 1974 three Jan., 1980-July, 1980 April, 1980 three July, 1981-Nov., 1982 July, 1982 four
Source: Shearson Lehman Bros.
