Clinton Off to an Early Honeymoon With Investors
The Bill Clinton Rally?
Investors’ collective attitude toward stocks has turned strongly positive in recent weeks, and some of Wall Street’s favorite barometers are pointing toward a sustained market rise at least through the end of the year.
Many Americans may not truly believe that President-elect Clinton can work magic with the economy, but investors nonetheless seem to be giving Clinton the benefit of the doubt:
* Polls of investor sentiment show the proportion of bulls swelling while the bears fade. The Investors Intelligence weekly poll of investment newsletter writers nationwide now shows 45.1% of them bullish, up from 35.7% three weeks ago. Meanwhile, only 31% of the newsletter advisers are bearish, down from 34.8% three weeks ago. (Those not outright bullish or bearish expect a short-term market “correction.”)
In a weekly poll of small investors, the American Assn. of Individual Investors finds 49% bullish, up dramatically from 20% three weeks ago. Only 24% of investors now are bearish, down from 56% three weeks ago. The rest are neutral.
* High-risk markets that investors have shunned for long periods are suddenly attracting new interest. Case in point: Biotechnology stocks, which crashed in the first half of the year, are back in demand as buyers take a closer look at the new drugs many of the companies have in the pipeline.
Thousand Oaks-based Amgen Inc., perhaps the best-known biotech issue of them all, has risen to $70.75 per share from a low of $60.75 in September. Another favorite, Biogen Inc., has rocketed to $45.125 from $32.125 at the end of September.
* Small-company stocks in general are zooming, while the blue chip Dow Jones industrial average lags. The NASDAQ composite index of 4,000 mostly small stocks has jumped from 570.52 on Oct. 9 to 627.76 on Tuesday, a 10% gain. In contrast, the Dow has risen just 3% in that period.
Many analysts believe that the healthy demand for small stocks--at the apparent expense of blue chips--reflects investors’ expectations that Clinton will have at least some success re-energizing the U.S. economy in 1993, even if overseas growth sputters (in Europe, for example). Because smaller companies make most of their sales here rather than overseas, they’re expected to post better 1993 growth than blue chip multinationals, whose overseas business could be a drag on earnings.
“I have to think that investors feel Clinton is going to help smaller companies,” says Larry Rice, small stock trading chief at brokerage Wedbush Morgan Securities in Los Angeles.
But some Wall Streeters suspect that the big rally in small stocks also is a function of the calendar: Historically, small stocks usually surge in January, as the new year begets a wave of investor optimism. As this “January effect” on small stocks has become widely recognized in recent years, some investors have tried to get a jump on the phenomenon by snapping up these stocks in November and December.
“I think we’re seeing the ‘January effect’ become more a ‘November and December effect,’ ” concedes Bill Dutton, manager of the Skyline Special Equities small stock fund in Chicago.
That raises a key question: At what point does investors’ new optimism turn into rampant speculation, signaling a temporary peak in small stocks and probably the market overall?
The investor sentiment polls suggest that we’re not yet in the danger zone, says Michael Burke of Investors Intelligence in New Rochelle, N.Y. While it’s true that a high proportion of bulls often signals a market top (too much optimism), “we need to get above 50% or even 55% bullish before I’d worry about a market correction,” Burke says. At the market peak last winter, the bulls reached 60%, he notes.
Jim Collins, a small-stock manager at Insight Capital in Moraga, Calif., figures that the rally won’t begin to overheat until the beginning of January. And in the meantime there’s plenty of money to be made, he says. He notes that the NASDAQ composite index still hasn’t surpassed its all-time high of 644.92, reached last February.
Taking a longer view, Collins says many small companies have reported strong earnings growth this year despite the slow economy. That suggests that even a moderate boost to the economy in ’93 could spur dramatic earnings gains at small firms.
Of course, prices of some high-flying small stocks may already reflect 1993 earnings and then some. But because Wall Street still pays so little attention to small companies, it’s not tough to find bargains, Dutton says. The average price-to-earnings ratio (P-E) of stocks in his $90-million portfolio is just 13 based on estimated 1992 earnings per share, compared to a P-E of 18 for the blue chip Standard & Poor’s 500 index.
Small Stock Surge The NASDAQ composite index of about 4,000 mostly small stocks has jumped 10% since Oct. 9 and is fast approaching its all-time high set in February. Tuesday: 627.76
