How to Scatter Investment Fog
Are you baffled by the economic signals? Wondering why the stock market is going down if things are finally getting better? Worried about a new rise in interest rates?
Anyone trying to make investment decisions this year has been buffeted by some surprising crosswinds in financial markets. It’s a confusing and potentially dangerous period for investors.
But maybe things are less complicated than they seem. If you’ve got money to invest, it’s time to clear your head and set a game plan for 1992 and beyond.
Here, in capsule form, are five ideas to help you focus your strategy:
* No. 1 consideration: An economic recovery is probably here. Friday’s report on February employment was another case of muddy waters: The nation’s jobless rate rose to 7.3% from 7.1% in January, even though 164,000 jobs were created.
Such mixed signals are typical at the outset of a recovery, experts say. As businesses and consumers slowly start spending again, growth resumes in fits. It’s never a clean process.
But look at the evidence reported just last week: Major retailers said February sales were strong; factory orders rose in January for the third time in four months; and a U.S. Chamber of Commerce survey of 8,000 businesses showed 47.4% believe that business will turn up in the next six months, versus just 17.6% who said so in December.
Some people still have their doubts about a recovery, but you’d probably be smart to take the advice of Shearson Lehman Bros. economist Robert J. Barbera, who recently told clients in a letter: “Stop acting so glum: It’s a real recovery and that’s good news.”
* A recovery is bullish for stocks--though not necessarily right away. After soaring early in January to record highs, many stocks have slumped. The Standard & Poor’s 500-stock index, at 404.44 on Friday, has fallen 3% since Jan. 1. Some stocks are down much more than that.
Why are stocks falling when signs of recovery are abundant? Because those same recovery signs have pushed interest rates up, on the expectation that inflation and demand for money will rise significantly with the healing economy.
The stock market hates higher interest rates because they make bonds and other investments more attractive compared with stocks. Given that many stocks reached all-time highs in January, it’s not surprising that a little more competition from interest rates would cause some investors to hurriedly take their stock profits and run.
But keep your eye on the horizon: An economic recovery will bring a recovery in corporate profits as well. Ultimately, that’s what underpins stock prices. As profits are reported each quarter this year, investors will find more reason to get excited about stocks. So if you believe in a recovery, it’s illogical to think stocks have peaked.
If you want proof that higher profits are on the way, look at the rising number of companies boosting cash dividend payments to shareholders. Dividends were in a downtrend for nearly two years, until last fall. Because dividends come from profits, a rising dividend trend tells you that companies are much more optimistic about profits.
* A recovery is bullish for stocks--though not necessarily all of them. Check out the accompanying table showing “Stock Funds: New Leaders.” It shows how some of last year’s hottest stock mutual funds are dogs this year.
Last year’s leaders owned mostly “safe” stocks such as food and health care stocks--a great place to hide during a recession. But when the economy rebounds, Wall Street moves out of those issues and into stocks of industrial companies whose products should begin to sell well again: cars, appliances, machinery, computers, etc.
Like the economy’s recovery, this too is a start-and-stop process. But if you own only the safe stock funds that led the market last year, you risk missing out on the biggest winners of a recovery.
The lesson here: Make sure your stocks and/or stock funds include some issues that should surge with renewed economic growth. This is basic diversification--simple, and easy to accomplish if you just give it some thought.
* Don’t bet on a big rise in interest rates. Yes, they’re already up this year. Yes, a recovery should mean more demand for credit. But if you think double-digit rates will be commonplace again soon, you’re just kidding yourself, most experts say. That’s because economic growth will likely be slow, and inflation is under control.
Since the 1960s, investors have watched inflation rise whenever the economy has expanded. Inflation erodes the value of money. So if you believe that inflation is returning in a big way, you would assume that the cost of money must rise as well to make up for the inflation erosion.
But think about the world today: There’s an oil glut that keeps energy prices depressed; global competition forces companies to keep their product prices down; and the spend-like-crazy mode of American consumers in the 1980s has been replaced by a spend carefully/save a lot more mode. So where’s the inflation threat?
“Everybody’s always fighting the last war--and in this case it’s inflation,” says Jim Melcher, who manages $50 million at Balestra Capital in New York. High inflation won’t return, he says, and that’s the most important reason why interest rates will stay reasonable over the next few years.
So if you want to buy bonds or bank CDs, yes, you’ll probably get higher yields later this year. But the surprise may be that you won’t earn much more than what those investments pay today. Consider: The yield on 5-year Treasury notes has already jumped to 6.9% from 6.0% just two months ago.
* Don’t try to time the ups and downs in stocks or interest rates. The greatest temptation for small investors is to try and buy at just the “right” moment--when stock prices are at their lows, and interest rates are at their highs. But mostly, people who wait for the right moment end up waiting forever.
If you’ve got money that you want to invest for the long term, don’t do it at once now. Make a list of the investments you want and buy in small installments--say, monthly or every other month--over the next year or so.
Why go slow? Stocks and interest rates are likely to ebb and flow this year, as the recovery takes shape. In the short term, anything can happen to investment values, as people overreact. As Melcher notes, “Psychology rules the markets in the short term. But supply and demand rule in the long run.”
If you buy in regularly over time rather than all at once, some months you’ll buy high and some you’ll buy low. Thus, you’re protected from the risk of investing every dime at a market peak. This strategy takes discipline, but it sure beats trying to predict the future.
Investing: New Opportunities, New Dangers
Signs are growing that the economy is recovering from recession. That presents new money-making opportunities for investors, and also new pitfalls. A look at some shifting trends: Interest rates turn up (Source: Federal Reserve Bank of St. Louis) . . .but so do dividends (Source: Standard & Poor’s Corp.
Stock Funds: New Leaders
Some of 1991’s Hot Funds Cool . . .
Total return: Fund 1991 Year to date Financial Funds: Health* +92% -8.5% Dean Witter Capital Growth* +48% -6.7% Value Line Leveraged Growth* +46% -5.2% Oppenheimer Global Biotech +121% -3.9% CGM Capital Development* +99% -0.6% Average general stock fund +36% +1.3%
. . .and New Leaders Emerge
Total return: Fund/phone number 1991 Year-to-date Gabelli Value Fund/800-422-3554 +15% +12.7% Mackenzie American/800-456-5111 +9% +10.0% SunAmerica Cap. App.*/800-858-8850 +30% +8.3% Lindner Fund*/314-727-5305 +23% +8.0% Vanguard Primecap*/800-662-7447 +33% +4.2% Average general stock fund +36% +1.3%
Source: Lipper Analytical Services * denotes no-load fund
