A Time to Take Stock : Dull Third Quarter for Wall Street, but Fireworks May Be Ahead

By TOM PETRUNO

Oct. 1, 1992 12 AM PT

TIMES STAFF WRITER

Another steep drop in interest rates lifted Wall Street out of its funk in the third quarter, but picking winners among individual stocks was tougher than a rigged shell game.

That should change soon, some analysts say. To the surprise of most investors, a big, broad rally could precede or follow the presidential election--no matter who wins, the bulls argue.

Most broad stock market indexes finished the quarter Wednesday up 2% to 4% from June 30, a significant improvement from the steep losses many issues suffered in the first half of the year.

But many investors spent the quarter on the sidelines, waiting for something major to push stocks either dramatically higher or lower. As hopes for a meaningful global economic recovery have faded, Wall Street has groped for some other reason to stay in stocks, and found only the comfort of a continuing slide in interest rates.

The relative few investors who have been buying have chased an extraordinarily eclectic mix of stocks. The clear leaders for the quarter were energy stocks, buoyed by rising natural gas prices. Energy exploration stocks, for example, jumped 30.1% for the quarter as a group, Standard & Poor’s industry group indexes show.

Outside of energy, though, it was strictly pick and choose--even within the same industries:

* Semiconductor stocks rocketed 15.9% as a group in the quarter, while computer makers’ shares tumbled 12.4% on average.

* Manufactured housing stocks leaped 15.1% on average, while savings and loan stocks sank 18.7% overall.

* Specialty chemical companies rose 7.4%, but most other heavy industries suffered badly on worries about the economy. Of 88 S&P; groups, auto stocks fared the worst, falling 19.2%.

* Among broad market categories, small stocks took the lead, as the NASDAQ composite index jumped 3.5% for the quarter. But Los Angeles-area NASDAQ stocks still lag, a measure of the severity of the local recession.

If a clear market trend is what investors want, however, many analysts believe that’s exactly what they will get in the fourth quarter that begins today: Once the uncertainty of the presidential election is behind the market, stocks are likely to rocket or plummet, experts say--no more of the dull trading range that has dominated this year.

Richard McCabe, analyst at Merrill Lynch & Co. in New York, believes that the market is primed for a major rally. The Dow Jones industrial average, at 3,271.66 Wednesday, could jump 7% to 3,500 by year’s end, McCabe says.

He bases his bullishness, in part, on the mountain of cash that big investors have accumulated this year as they’ve shied away from stocks. Stock mutual funds, for example, now hold 9.9% of their $416 billion in assets in cash, up from 8% a year ago.

At some point before or soon after the election, investors are likely to begin buying stocks as a bet on a healthier economy in 1993, McCabe and other analysts say. Given the size of stock funds’ cash hoard, the ensuing rally could be dramatic, they contend.

William Dodge, investment strategist at Dean Witter Reynolds in New York, agrees. Despite the thick gloom about consumer confidence in particular and the economy in general, Dodge believes that “in the last six to eight weeks, everything has turned” favorable for stocks worldwide.

He cites Japan’s decision to begin stimulating its economy with massive public-works spending; the realization by both U.S. presidential candidates that the federal government will have to actively stoke the U.S. economy in 1993, and the first cut in German interest rates since 1987, signaling a major turn in Europe’s economic outlook.

Global promotion of economic growth next year should succeed at least modestly, Dodge believes--enough to lift corporate profit and thus stocks, he says. “The risks (of buying) are coming down,” he adds. “Our thesis is to start leaning against the pessimism.”

Not everyone is convinced. William Mason, who manages the $500-million investing arm of Imperial Bancorp in Los Angeles, believes that the market may be good for one last rally. But “I think it’s extremely late in the game.”

Mason doesn’t believe that economic growth or corporate profit will be strong enough in 1993 to justify higher stock prices. “We would be lightening up (on stock holdings) from here” if the market rises, he says.

Still Waiting on Wall Street

Rates Fall Again in the 3rd Quarter . . .

3-month Treasury bill yields, Sept. 30: 2.75%

. . . giving stocks a boost . . .

Third quarter performance of key indexes

Dow utilities: +4.5%

NASDAQ composite: +3.5%

S&P; 500: +2.4%

NYSE composite: +2.3%

NASDAQ L.A.-area: +2.2%

Dow industrials: -1.4%

. . . but most still are down for the year