‘91-’92 Business. A look back and a look ahead. : OUTLOOK ’92 : <i> With bond and CD yields plunging, a tidal wave of new investors moved into the stock market in 1991. What happens now? Here’s a look at some of the trends that may affect stocks in the new year, for better or worse. </i>
CAN SMALL STOCKS REPEAT?: 1991 was the year of the small-company stock. The NASDAQ composite index of about 4,000 small stocks jumped 56.8% for the year, closing Tuesday at 586.34. That was the best annual performance in the 20-year history of the index, and it far outran the 20.3% rise of the Dow Jones industrials. Small-company stocks roared to life in 1991 for two key reasons: They had been badly beaten up in the 1990 bear market (the NASDAQ index lost 17.8% in that year), and history has shown that small-company profits typically rebound sharply when the economy emerges from recession.
What about 1992? Wall Street is still waiting for the profit rebound, but there is one encouraging sign: Prudential Securities’ analysis of 988 small companies shows that their total profits fell just 3.8% in the third quarter ended Sept. 30, compared to the same period of 1990. In contrast, profits of the big-company Standard & Poor’s 500 stocks dropped 28% in that period. So small companies did a better job of stemming the slide last year. That could also mean that those companies will be in far better shape to score big profit gains this year if the economy turns around. Wall Street analysts generally expect S&P; 500 company profits to rise 15% to 25% this year from 1991. Thus, if small companies beat the S&P;, their profit gains in 1992 will be handsome indeed.
Another argument for a continuing rally in small stocks is that their prices still are reasonable relative to earnings potential, contends Jack Laporte, manager of T. Rowe Price Associates’ New Horizons stock mutual fund in Baltimore. New Horizons, which concentrates on small stocks, has since the 1960s provided a benchmark overall price-to-earnings ratio for the stocks in its portfolio. At the height of the small-stock bull markets of 1968, 1972 and 1983, the New Horizons P-E ratio was more than twice that of the big-stock Standard & Poor’s 500 index, based on expected earnings for both in the year ahead. In contrast, the New Horizons P-E now is about 1.1 times the S&P; 500 P-E, and it has been stuck at that level since 1987. In essence, Laporte is betting that the current small-stock rally won’t end until frantic investors are willing to pay twice what the stocks are worth today.
A VOTE FOR MID-SIZE STOCKS: Even better bets than small-company stocks in 1992 are the “middies,” argues Prudential Securities’ Greg Smith, the firm’s chief investment strategist. He sees mid-size companies generally in better shape to cope with the difficult economy. Wall Street decides who is small, mid-size and large by market capitalization (a company’s stock price times number of shares outstanding). That ranking corresponds roughly to other measures of company size--by sales, for example. A small company generally is one with a market capitalization less than $250 million. A big company would be capitalized at $2 billion or more. Between are the middies.
Smith says that “mid-cap companies seem better situated than both large-cap and small-cap companies.” How so? In a very competitive business environment, Smith says, big companies spend a lot of time trying to protect the market share they’ve won. Middies, by contrast, “have less of an entrenched market to protect and so can devote more of their resources toward developing new markets.” Meanwhile, the middies have an advantage over smaller companies because middies usually boast “more in-depth management and greater financial and organizational resources.” Who are the middies? Some of Pru’s favorites include health care firm Allergan Inc., brokerage A.G. Edwards, personal computer firm Dell Computer and electric utility Wisconsin Public Service.
ARE INSIDERS FLASHING ‘BUY?: Corporate insiders--officers and directors--often exhibit a fine ability to discern when their companies’ stocks are bargains. They proved that again in December. The Insiders newsletter of Ft. Lauderdale, Fla., which tracks insiders’ open-market stock purchases and sales via their filings with the Securities and Exchange Commission, says 59% of all insider transactions during the past 30 days have been purchases, while 41% were sales. That’s a sharp reversal from most of summer and fall, when insiders were much heavier sellers than buyers of their own shares. From mid-September to mid-October, for example, purchases accounted for just 36% of all insider transactions, whiles sales accounted for 64%.
Last month, “it looks like the insiders started buying rather significantly just before the rally started” on Dec. 18, says Norman Fosback, editor of The Insiders. The Dow Jones industrials’ fall from 3,077 in October to 2,863 by early December apparently was enough to entice the executives. Even so, the insiders’ new bullishness is nowhere near the levels of autumn, 1990, when the Dow index bottomed at 2,365. At that point, insiders were massively buying their companies’ shares: Purchases accounted for a stunning 90% of all insider transactions. It was one of the best insider buy signals in history, Fosback says. In comparison, the December reading of 59% purchases doesn’t stack up--and with stocks again at record highs, it’s probably too late to follow the insiders into the market now, warns the cautious Fosback.
THE ‘ELECTION YEAR THEORY’ IS BULLISH: The stock market has shown an amazing propensity to rise in presidential election years, no matter which party occupies the White House. The theory has been that sitting presidents will do what’s necessary to stimulate the economy (and thus corporate profits) in election years to get themselves reelected. Or the market may become enticed by the promises of the challenger.
Either way, the Standard & Poor’s 500 index has risen in nine of the 11 presidential election years since World War II. The two exceptions: In 1948, when Harry S. Truman was challenged by Thomas Dewey, the S&P; slipped 0.7% for the year; and in 1960, when John F. Kennedy and Richard M. Nixon vied to succeed retiring Dwight D. Eisenhower, the S&P; lost 3%. What about 1992? There’s no question that George Bush wants to boost the economy. But given that this recession is far different from any since the Great Depression--because the problem is too much debt, not high interest rates--some experts question how much the economy will respond to traditional Washington stimuli.
Market Indexes for ’91
1991 1991 Index close change NASDAQ composite 586.34 +56.8% S&P; Mid-Cap 146.59 +46.6% Wilshire 5,000 4,041.10 +30.3% AMEX market value 395.05 +28.2% NYSE composite 229.44 +27.1% S&P; 500 417.09 +26.3% Dow industrials 3,168.83 +20.3%
Stocks and the President How the S&P; 500 stock index has risen or fallen in post-World War II election years:
Victor/ S&P; 500 Year Party change 1988 Bush/R +12.4% 1984 Reagan/R +1.4% 1980 Reagan/R +25.8% 1976 Carter/D +19.1% 1972 Nixon/R +15.6% 1968 Nixon/R +7.7% 1964 Johnson/D +13.0% 1960 Kennedy/D -3.0% 1956 Eisenhower/R +2.6% 1952 Eisenhower/R +11.8% 1948 Truman/D -0.7%
Source: Standard & Poor’s
