MIDYEAR INVESTMENT REVIEW : Where to Put Your Money Now : Investing: Experts say smart investors will spend the next six months laying the groundwork for 1992.

In a mid-June market outlook, Prudential Securities chief strategist Greg Smith summed up what many investors were already feeling.

“Near term,” Smith’s report began, “the beach probably beats stocks and bonds.”

As a euphemism for leaving your cash idle for the next few months, the beach probably beats real estate, gold, oil and a host of other investments as well, many experts now suggest.

With the American economy groping its way out of recession, financial markets are at one of those terribly fog-bound crossroads where nearly every path suddenly seems too risky to take. And in fact, the smart investor may well be rewarded for mostly planning instead of acting this summer, experts say.

For most of the first half of 1991, many investment trends were clear: Stocks were soaring in the wake of the stunning U.S.-led allied victory over Iraq; short-term interest rates were falling as the Federal Reserve sought to pull the nation out of recession, and real estate prices firmed on the expectation that a revived economy would end fears of a New England-style property crash nationwide.

But since early June, nearly everything again seems in doubt. Stung by continuing weak corporate profit reports, stocks are tumbling from their record heights on fears that the economy won’t recover fast enough, if at all, this year. That fear has also sunk prices of commodities, such as oil. Meanwhile, the Fed seems reluctant to let interest rates drop further, which has hurt bonds.

And worldwide, worries are growing about the potential for complete economic collapse in the Soviet Union--a crisis that could make the Persian Gulf War seem relatively minor in importance.

Madhav Dhar, who plots Morgan Stanley & Co.’s global stock strategy, may be speaking for most investments when he admits that “over the next six months, I’m not terribly optimistic that I’m going to make real money in any of the world markets.”

For individual investors, that isn’t necessarily a disastrous outlook. Historically, financial markets have often churned for extended periods while important new economic and social trends took shape. When the evidence finally became weighty enough to suggest there was money to be made again, the markets have exploded skyward--and investors who followed patient, well-thought-out strategies in the transition periods were rewarded.

After the wild events of the last 12 months--and the heady gains that stocks in particular have made this year to date--the second half of 1991 may prove disappointing for many investors, strategists warn. But this is the time to lay the groundwork for the next few years rather than the next few months, experts say.

Here’s a look at key investment categories and their prospects for the balance of 1991:

U.S. Stocks

After losing 6% in 1990, the average stock mutual fund scored a handsome total return of about 16% in the first half of the year. If stocks were to gain that much in the second half, the Dow Jones industrial average would rise from 2,906 now to 3,370 by year’s end. Almost no one thinks that’s even remotely possible.

Since 1975, the stock market has shown an eerily similar pattern in most years: Strong gains in the first six months and flat to down performance in the final six months. In that 17-year span, the Dow has risen in the first six months 76% of the time and fallen or finished flat in the second six 63% of the time.

It’s happened so often that many portfolio managers joke that they may as well sell everything at midyear and go golfing for six months.

Of course, liquidating all of your stocks purely for seasonal reasons isn’t practical. But many stock pickers say they simply can’t find a lot worth buying now. Most want further proof that the economy won’t slip back into recession. And most also say corporate earnings now have to catch up with stocks’ tremendous surge in the first half--which has left the average blue-chip stock selling for 17 times estimated 1991 earnings per share. Historically, that high a number has generally signaled a market peak.

Kurt Winrich, who manages $230 million at Winrich Capital Management in El Toro, is typical of many cautious money managers. The economy may appear to be recovering, but it isn’t translating into better corporate earnings yet, he says. As a result, “I don’t think we’re going to get through second-quarter earnings reports without a lot of disappointments,” he says.

But by fall, Winrich sees the Federal Reserve cutting interest rates again, rejuventating stocks. He figures the Dow could fall to 2,800 in the interim, as more worried investors bail out.

Chicago money manager John Rogers, whose $1.5-billion-asset Ariel Capital Management focuses on small stocks, has been buying lately as prices have pulled back. But he too is still cautious, keeping 9% of his stock portfolio in short-term “cash” investments, versus a normal 1% to 2%.

In discussions with managers of about 35 of the companies in his portfolio, Rogers says, “these people don’t see much of a turn in the economy yet.”

The smart strategy for individual investors, say Rogers and other pros, is to assume the real recovery in the economy will come in 1992. Now’s the time to identify stocks and stock mutual funds you want to own for that recovery, they say. As prices pull back this summer on bad news, start putting that money to work--but slowly.

Foreign Stocks

The typical international stock mutual fund rose just 5% in the first half of the year. In native currencies, many foreign stock markets sharply outpaced the U.S. market--shares in Australia rocketed 20% on average, Singapore 18% and Sweden 35%, for example. But the strong dollar meant that foreign stock gains were muted when translated from native currencies to dollars.

In the second half of the year, many experts see the dollar continuing to edge higher. They also believe that foreign stock markets will be held back by the same economic uncertainty that’s likely to weigh on U.S. stocks. Thus, “It’s hard to be table-pounding about anything right now,” says Morgan Stanley’s Dhar.

Dhar warns that many overseas markets have become as expensive or more expensive than U.S. stock at 17 times estimated 1991 earnings. Even so, he still finds “a lot of high-growth value” in German stocks, which he says sell for 12 to 14 times earnings. And he remains heavily invested in smaller Asian markets such as Malaysia and Hong Kong, where economic growth continues to be strong despite the U.S. recession.

For individual investors, the real attraction in foreign stocks is the same as it ever was: Add up the value of all the stocks in the world, and the U.S. now is less than half of the total. If you ignore foreign markets, you ignore the majority of potential stock market opportunities in the world.

It’s also important to remember that foreign markets often go their own way, ignoring trends in the United States. Lately, for example, the Sao Paulo market in Brazil has been soaring on the belief that Brazil is emerging from its long depression. The New York Stock Exchange-traded Brazil Fund, which owns Brazilian stocks, leaped 50% in the second quarter--from $9.75 to $14.625 a share--while the Dow Jones average was virtually flat.

Treasury and Corporate Bonds

The key question for bond investors is: How much more can interest rates rise in the second half of the year, assuming that the economy starts to grow again?

The answer, says bond mutual fund manager David Schroeder, is not much--or at least, not much once Uncle Sam gets done with a mammoth quarterly bond sale in August.

The yield on 30-year Treasury bonds, which is the benchmark long-term rate that big investors watch, has risen to 8.4% now from 8% in early February as panicky bond traders have anticipated rising demand for money with an economic recovery.

But Schroeder, who manages the $180-million Benham Treasury Note Fund in Palo Alto, figures that at 8.6% or so, “that bond yield has factored in a recovery of significant strength.”

Even with the upward blip in long-term interest rates this year, experts note that rates overall have remained confined to a fairly narrow range--screaming headlines notwithstanding. If you owned the typical bond fund in the first half of this year, you earned about 6% in total return (interest plus capital gain).

The pros see much of the same in the second half of this year, unless the economy surprises everyone by taking off like a rocket.

So, for investors who need income, current yields of 7.9% to 8.4% on 5-year to 30-year Treasury securities and 9% to 10% on corporate bonds are about as good as it’ll get, many analysts say.

William Gross, managing director of giant Pacific Investment Management in Newport Beach, sees the 30-year T-bond yield peaking at 8.75% this summer and falling to 8% by year’s end. Rates will probably hit their highs as the Treasury gets ready to sell a record amount of debt in August, Gross and others say--good reason to keep some of your powder dry until then.

In general, Gross, Schroeder and others say income-needy investors ought to be very happy with 7.9% yields on 5-year Treasury notes for years to come. Why bother with riskier corporate bonds that pay only a percentage point or so more, they say, when Uncle Sam will pay you so well without any credit risk? Plus, you don’t pay state income tax on Treasury bond interest.

Municipal Bonds

The second-half outlook for municipal bonds is much the same as that for corporate and Treasury bonds, analysts say. In general, tax-exempt bond yields are expected to remain in a narrow range, after inching up slightly in recent months.

Bernie Schroer, who manages the $11-billion Franklin California Tax-Exempt bond mutual fund in San Mateo, says that while a slew of new Treasury bonds will be sold this summer, in the California muni market “there isn’t a monstrous supply coming up.” What’s more, he said, there is continuing strong demand as investors flock to muni bonds for their lucrative yields.

His fund, for example, now yields around 6.8%. For an investor in the combined 32% federal/state tax bracket, that’s the same as earning 10% on a bank certificate of deposit (CD). (Because California residents get both a federal and state tax exemption on California bond interest, it doesn’t make much sense for residents to own muni bonds of other states, whose interest would be taxable by California.)

Even so, muni yields are likely to move up a bit if Treasury yields rise in August, as expected. So investors shouldn’t feel rushed to buy munis yet--especially considering that the state still is wrangling with budget troubles that could affect its credit rating (though a notch-lower rating isn’t expected to change yields significantly, bond experts insist).

What about default risk? Schroer can’t see how California’s economic problems could lead to a rash of defaults among city or county bond issuers. That just doesn’t happen in a state whose economy is as diverse as California’s, he argues.

And in any case, investors who own muni bonds through mutual funds have the protection of diversification. Schroer’s huge fund, for example, owns 1,800 different bonds.

Money Funds / CDs

These short-term “cash” investments were just about the worst place to have your money in the first half of 1991. If you took out a 1-year CD at a Los Angeles bank or thrift on Dec. 31, chances are the annual yield was around 7.2%. So in the first six months of the year, you earned half that, or 3.6%.

Compared to 16% in the stock market and 6% in the bond market, 3.6% is peanuts.

In the second half of the year, though, the surprise could be that 3.6% will look great if stocks and bonds have a worse time than the experts figure.

But if you’re betting that short-term interest rates are going to jump sharply between now and the end of the year, many analysts say you’re dead wrong. At best, expect only slightly higher short-term rates.

Why? Because the Federal Reserve controls them, and the Fed “is going to be very reluctant to raise rates” for fear of prolonging the recession, says Pacific Investment Management’s Gross. Some experts believe that the Fed may in fact cut rates further to keep the economy moving out of its slump.

The bottom line: Today’s paltry 5.5% annualized yields on money market funds may be around for longer than many cash-heavy investors would like.

As a short-term parking place, money funds may be unbeatable for the next few months as stock and bond markets grapple with worries over the economy’s next move. But to leave too many of your dollars in cash investments beyond summer could cost you dearly in the long run, experts say. Be ready to move it.

Real Estate

Did your house fall in value in the first half of this year? Many California homeowners probably don’t want to know the answer to that. And as for the next six months, whether home values here rise or decline depends largely on the strength of the state economy’s recovery--which is an open question.

For those investors who can take a long-term view, however, some analysts say this is a good time to begin looking for opportunities in troubled real estate in California and nationwide. And for the average investor, one of the easiest ways to play a real estate rebound is via real estate investment trusts.

The REITs are investment companies that own apartments or commercial property and pass the rents earned through to shareholders as dividends. Many REITs are listed on the New York Stock Exchange and NASDAQ market.

In the first half of this year, REIT stocks soared as interest rates came down and as investors shook off their fears of a nationwide real estate crash. Now, some healthy REITs are eager to start shopping for depressed properties--which could be a boon to their shareholders in the long run.

For example, the Real Estate Investment Trust of California, a 23-year-old firm that owns income-producing shopping centers and apartment buildings throughout the state, just raised $25 million in a stock offering, for new property purchases. The L.A.-based trust’s current properties have boasted 95%-plus occupancy rates for 10 years, and it has raised dividends to shareholders each year since 1982. At $15.75 a share on the NYSE, the stock yields about 9% at the current annual dividend rate.

Robert Frank, a real estate analyst at Alex. Brown & Sons in Baltimore, sees strong REITs increasingly filling a lucrative niche in real estate finance abandoned by panicked commercial banks. His favorite REITs include two Southland firms with long experience owning high-income-producing medical properties: American Health Properties ($27.25, NYSE) and Nationwide Health Properties ($22.375, NYSE).

Commodities

Gold started the year at $394 an ounce, and now is around $368, for a loss of 7%. Silver started at $4.19 and has risen to $4.42, up 5%.

For the average investor trying to play gold or silver for a big gain, neither metal may have been worth the emotional trauma involved in enduring their crazy price swings.

In gold’s case, if you don’t expect inflation to return this year, there’s little reason to buy it now, money managers say--except as traditional end-of-the-world insurance. Silver is more a bet on a strong industrial rebound since so much of the metal is used by industry.

Overall, the commodity picture is moribund. The Commodity Research Bureau’s index of 21 key commodities has fallen to a four-year low in recent days, despite signs of economic recovery. Until industry clearly emerges from recession, commodities look like losers, analysts say. And even then, playing this market is only for the steel-nerved investor.

Mid-Year Investment Roundup

How different types of investments fared in the first half of 1991, compared to full-year returns in 1989 and 1990. For financial investments such as stocks and bonds, total returns are listed (price change plus interest or dividends earned). For hard assets such as gold and commodities, returns are price change only.

Average total Investment 1989 1990 Stocks, small-company growth mutual funds +23.0% -10.9% Bonds, corporate high-yield “junk” +4.8% -4.4% Stocks, technology mutual funds +22.1% -3.7% Stocks, average general mutual fund +24.0% -6.3% Stocks, blue chips (S&P; 500, with dividends) +32.3% -3.1% Dollar vs. foreign currencies +2.3% -7.0% Silver, Comex near-term futures -13.7% -19.6% Bonds, 20-year municipal issues +13.4% +7.9% Bonds, mortgage-backed issues +15.6% +10.8% Stocks, international mutual funds +22.3% -12.9% Bonds, high-quality corporates (10-years + up) +16.0% +7.2% CDs, five-year +8.1% +8.0% Bonds, 1- to 10-year Treasuries +13.3% +9.5% CDs, one-year +8.0% +7.8% Money market mutual funds +8.9% +7.8% Bonds, long-term Treasuries (10 years + up) +20.9% +6.5% Stocks, gold-oriented mutual funds +22.5% -25.2% Gold, Comex near-term futures -1.8% -2.1% Platinum, NYMEX near-term futures -5.7% -16.1% Crude oil, NYMEX near-term futures +26.6% +30.3%

return: Investment 1st half Stocks, small-company growth mutual funds +23.5% Bonds, corporate high-yield “junk” +20.4% Stocks, technology mutual funds +17.0% Stocks, average general mutual fund +16.5% Stocks, blue chips (S&P; 500, with dividends) +14.2% Dollar vs. foreign currencies +8.0% Silver, Comex near-term futures +5.5% Bonds, 20-year municipal issues +5.3% Bonds, mortgage-backed issues +4.7% Stocks, international mutual funds +4.6% Bonds, high-quality corporates (10-years + up) +4.0% CDs, five-year +3.7% Bonds, 1- to 10-year Treasuries +3.5% CDs, one-year +3.3% Money market mutual funds +3.1% Bonds, long-term Treasuries (10 years + up) +1.6% Stocks, gold-oriented mutual funds -0.7% Gold, Comex near-term futures -6.6% Platinum, NYMEX near-term futures -7.5% Crude oil, NYMEX near-term futures -27.7%

Sources: Lipper Analytical Services (mutual fund return estimates); Merrill Lynch (bond indexes, through Thurs.); Bank Rate Monitor (CD return estimates); IBC/Donoghue’s (money fund return estimates); N.Y. Comex and Merc (metals); Morgan Guaranty (dollar index)

Interest Rates: Hard Choices

For savers, the first half of 1991 was a depressing time of shrinking yields on bank CDs and money funds. Chances are the decline is over now; still, if rates don’t rise in the second half, savers will regret that they didn’t move into better-yielding long-term bonds.

From Bear to Bull to . . . Now What?

The stock market was nothing if not emotional in the first six months of this year, as investor sentiment sank and soared repeatedly -- first because of the Persian Gulf War, and lately because of uncertainty over the economy’s next move.