Market’s Plunge Sounds Alarm for Reassessment : Stocks: Five professional investors foresee widely different futures for the economy. Short term, most are bearish.
Like an obnoxious alarm clock that goes off earlier than planned, the stock market’s surprise plunge has jolted investors awake. Although the 120.31-point Dow index tumble of Friday, Nov. 15, didn’t start a market meltdown--the Dow finished last week with a net loss of 40.47 points for the week, at 2,902.73--many investors have been forced to take a fresh look at stocks.
What is the market’s sudden weakness saying about the economy? And is the message serious enough to warrant bailing out of stocks while there may still be time? Staff writer Tom Petruno asked five market pros for their thoughts in the aftermath of Wall Street’s mini-crash:
DEWITT BOWMAN
Chief investment officer,
California Public Employees
Retirement System
“I think the market’s action really is in the nature of a warning,” said Bowman, a veteran of many bull and bear markets who has piloted the $66-billion, Sacramento-based CalPERS fund since 1989.
For some time, Bowman, 61, has taken the view that the economy won’t grow at the healthy pace that many other investors expect for 1992. “I don’t think corporate profits are going to be very good,” he said. “In fact, I think 1992 will show some real problems.”
That is why CalPERS’ managers have been “slowly reducing some of our equity exposure over the last few months,” Bowman said. While U.S. stocks had comprised 39% of the giant fund’s assets earlier this year, that has been whittled to 35%.
In stocks’ place, the fund has bought Treasury securities and other bonds. Looking out three to five years, Bowman believes that the 7% to 9% annual yields on bonds will be at least as good or better than what many stocks will provide in a slow-growth economy.
If Congress wants to make sure that slow growth doesn’t turn into no growth, Bowman said, it had better reform the banking system quickly, so that U.S. banks can compete globally. He would also like to see a tax cut that would “restore some vitality to the middle class.”
Despite his caution on the economy, Bowman said CalPERS is by no means fleeing U.S. stocks. He said he’s mindful that, in viewing the stock market through the clouds of California’s own deep slump, he must guard against undue pessimism about the national economy. “You get out to other parts of the country, and things don’t look quite so bad,” he said.
Small investors should also avoid becoming too fearful, Bowman said. “I’ve never known anyone to make money by being constantly pessimistic.”
CYRIL JAMES
Senior portfolio manager,
Northern Trust of California
Despite the stock market’s latest turmoil, James said, he didn’t make radical changes in his $500-million portfolio, which he has managed on behalf of individual and institutional clients since 1988.
James, 40, said he didn’t have any illusions about the economy even before the Dow’s 120.31-point plunge. “The claims of the economic pundits that a recovery was in place have just not been supported by the anecdotal evidence,” he said.
So rather than make bets on companies that might show improving earnings in 1992, the Los Angeles-based James has stayed with proven stocks whose earnings tend to be “resilient” even in a weak economy. Some of those include Jacobs Engineering, Philip Morris, retailer Gap Inc. and drug firm Bristol-Myers Squibb, he said.
Though such stocks might take temporary hits in a nervous market, James doesn’t believe in trading in and out en masse. “Some of these stocks are in long-term accounts, and they have tremendous capital gains” on paper, he said. Unless a company’s earnings outlook has changed for the worse, he said, “I can’t just blow these issues out,” because that would mean huge tax liabilities for clients--for no good reason.
While James is betting that 1992 will bring only modest returns in the stock market overall, he keeps his average stock for about three years. And looking out that far, he believes that “equities in general, and U.S. equities in particular, are going to be a great place to be.”
He hopes that Congress is smart enough to approve free trade with Mexico and South America, because, he said, that could create enormous demand for U.S. exports. “I really look to Latin America and Mexico to be superior engines of growth in the 1990s.”
ROBERT RODRIGUEZ
Chief investment officer,
FPA Capital, FPA New Income funds
“We should be thankful that we have the stock market,” Rodriguez chuckles, “because it’s the thermometer for the U.S. economy and for political ‘solutions’ that are not well thought out.”
Congress’ idea to cap credit card interest rates--a major catalyst in the Dow’s latest plunge--”is just lunacy” in a free-market system, he said. Rodriguez, who directs the $94-million First Pacific Advisors (FPA) Capital stock mutual fund and the $51-million FPA New Income bond fund in Los Angeles, hopes that that plan will be put to rest.
But as for how to quickly fix what ails the economy, “I don’t think anyone knows what the correct combination” of federal actions would be, he said. “I know I don’t.”
Even so, Rodriguez, 42, is optimistic about an economic recovery next year as businesses slowly rebuild their depleted inventories. And he advises individual investors to stop worrying so much about the big picture and focus on the opportunities in the stock market--because some always exist, he said.
“I’m still finding stocks selling for just 10, 11 or 12 times earnings (per share),” he said, versus 15 to 17 times earnings for the average stock. “To me, it doesn’t matter if the Dow is at 1,600 or 3,200. If I can find good companies, I’ll buy them.”
For example, he recently added Chatsworth-based computer disk drive maker Micropolis Corp. to his FPA Capital stock fund. “They’re going to come out (of the recession) just fine,” he said.
Rodriguez stresses that big payoffs in the stock market come only from patient, long-term investing that ignores short-term crises. On average, only 12% to 25% of his stock portfolio is turned over each year.
What’s he got to show for that patience? His FPA Capital fund ranked 45th of 2,000 mutual funds in performance during the five years ended Sept. 30, with a 126% gain. And his FPA New Income fund far outpaced the average bond fund in that time frame, up 67% versus the average bond fund’s 45%.
CHARLES LALOGGIA
Investment newsletter publisher,
Special Situations Report
LaLoggia, 40, is a bear, pure and simple. He has been for a long time, in fact--and thus he watched with incredulity as the stock market soared this year, despite what he believed was a deteriorating economic backdrop.
The Dow index’s 120-point plunge Nov. 15 was no fluke, LaLoggia contends: “I see this as the opening act of a major bear market.” If you own stocks, sell, he said.
For most of this year, investors have bid stock prices higher on the belief that an economic recovery was just around the corner. But the recovery hasn’t arrived, and it won’t in 1992 either, said LaLoggia, who writes from Rochester, N.Y. The stock market is just beginning to admit to that reality, he argues.
“This is not a normal recession,” he said. The Federal Reserve keeps cutting interest rates, but nothing happens--because most people, and companies, are already too deep in debt after the 1980s to think about borrowing more money to spend the economy back to health.
So another economic downturn is inevitable, LaLoggia said. He goes so far as to predict a “contained depression,” given the magnitude of the nation’s debt problems and rising job losses. And there is no way investors will be happy to hold on to stocks when that realization hits home, he said.
“Investors are willing to look across the valley--unless the valley is the Grand Canyon,” which is essentially the gulf he sees between now and the next economic growth cycle, he said.
He believes that the Dow index will slump to the low-2,000s range before bottoming. And it could get worse, he said, unless Congress undoes the damage that he alleges was done with tax changes in the mid-1980s.
“If you want to bring stability to real estate, restore some of the tax benefits for owning real estate” that were taken away by the 1986 tax reform act, LaLoggia said.
The same goes for the deductibility of consumer interest, he said. “The same idiots in Congress who phased out consumer interest deductions are now screaming because consumers are being squeezed by credit card interest rates.”
SUZANNE ZAK
Portfolio manager,
Seligman Growth stock fund
It isn’t often that Zak’s $550-million stock mutual fund has 10% of its assets in short-term cash investments. But that’s the case now, and Zak expects that large cash hoard to stay the same or grow in the foreseeable future.
Zak, 31, isn’t finding much worth buying in the market, even after the latest setback, she said.
She focuses her research on growth companies whose earnings gains are expected to far outpace those of the average company. If the market turmoil of the past week revealed anything, Zak said, it was the increasing split of that traditional list of growth stocks into two camps:
* There are firms such as Walt Disney and Waste Management, whose long-term prospects are solid but whose earnings have been clipped by the weak economy. “There isn’t enough evidence that the economy is beginning to turn to warrant increasing positions in those stocks,” Zak said.
* Then there are the growth companies that are still showing strong earnings gains, such as retailer Home Depot. The problem with those stocks is that other investors have bid them up to high levels that Zak isn’t comfortable paying. “I either want to wait for time to pass, to see the earnings come through, or I want the valuations to come down,” she said.
So, until the economy improves or the market turns lower, Zak said, “we’re doing more selling than buying.” How much of a drop would she have to see before she’d begin buying a stock such as Home Depot again? “I’d need it to be down 20%,” she said.
Still, most of what she already owns, she’ll keep. After all, growth stocks powered Zak’s New York-based Seligman Growth fund (part of the J&W; Seligman fund family) to a 27% gain in the first nine months of this year. And in the five years ended Sept. 30, the fund rose 95%, versus 79% for the average growth stock fund.
Many of these growth companies could benefit from the economy’s troubles, Zak said, as weaker competitors fold. “The market share that could be gained by some of these leading companies is kind of mind-boggling.”
