‘Tis the Crunch Season for Stock Fund Managers

Stock mutual fund managers are paid a lot of money to worry, and times like these almost seem to justify their gigantic salaries.

If you’re the typical U.S. fund manager, here’s what you’re dealing with now: With two weeks to go before year’s end your portfolio is up about 30%. You’re tempted to sell more of your stocks and take profits, but your investors (that’s you, dear reader) are still sending in cash, or at the very least they aren’t asking for any back.

What’s more, two potentially very positive events could occur in the next week or so: The Federal Reserve Board, which meets Tuesday, could cut short-term interest rates; and Congress and the White House could surprise even themselves and agree on a balanced budget plan.

So what do you do with your profit-stuffed stock portfolio? With most broad market indexes hanging close to their record highs even after Thursday’s mild sell-off, it’s clear that many portfolio managers aren’t doing much of anything with their funds except perhaps at the margin.

But that complacency raises the stakes for January. Normally that is one of the best months for stocks, as investors mentally start fresh and often with an optimistic outlook for the economy and interest rates.

This time, however, many stock managers concede they are worried about a huge rush for the door in January--if not before.

For one, there is a sense that a Fed rate cut and a balanced-budget deal are already priced into stocks and bonds. Thus, whether they happen or not, the markets may suffer an emotional letdown in the short term. Second, if Congress and President Clinton agree on a capital gains tax cut--as expected--profit-taking by investors who’ve been waiting for that incentive could temporarily become overwhelming in January.

“I think a lot of long-term holders will shoot first and ask questions later” if the capital gains tax cut becomes reality, warns David Bostian, investment strategist at Herzog Heine Geduld in New York.

The end result could be the 5% to 10% market pullback that everybody has been expecting for so long--and that a lot of people actually wish for, until it finally happens.

Let’s assume that that “correction” were to occur. The more important issue quickly becomes, What next? If you assume, as many pros do, that you can’t have a recession in a presidential election year, and that the world economy will chug along at a moderate growth pace in 1996, where do you want to be in the stock market?

Many Wall Streeters admit that they are increasingly hunting overseas. Japan is overdue to emerge from its recession; and with European interest rates falling, corporate earnings growth there could beat what most analysts expect will be slowing growth in the United States--the bummer earnings forecast Thursday from Finland’s electronics giant Nokia Corp. notwithstanding.

“We think it’s time to look to foreign stocks,” says Scott Lucas, chief equity officer at AIM Capital Management in Houston.

That same argument about weaker U.S. earnings growth overall also emboldens proponents of smaller U.S. stocks. Those shares generally have lagged U.S. blue chips this year, but if big-company earnings growth decelerates with the slower economy, faster-growing smaller companies ought to gain new fans, argues George Novello, manager of the Smith Barney Special Equities stock fund in New York.

Yet both the foreign- and small-stock arguments were made earlier this year as well. Instead, the money has mostly been made in U.S. blue chips.

Today, that sector is a split ticket. Classic brand-name stocks such as Philip Morris and Merck & Co. are roaring, while many “cyclical” industrial and technology names are already deep in their own personal corrections, thanks to worries about the economy’s sluggishness. But Rao Chalasani, strategist at Everen Securities in Chicago, suggests that investors who believe in a stretched-out economic expansion might find the best bargains soon among the beaten down cyclical issues, especially if January brings a bona fide correction.

Given all of the uncertainty, a reasonable 1996 bet might just be to stay with well-diversified blue-chip mutual funds. If the economy drags and interest rates fall, the big, brand-name stocks may have plenty of life left, offsetting cyclicals’ weakness. If business picks up here and overseas, the multinational cyclicals could resurge, and the brand-name issues also could benefit.

The point is, it has been a lousy idea to underestimate American blue-chip companies’ devotion to higher stock values over the last two years, and it may still be too early to sell them short.

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Setback in Progress

Broad market stock indexes are hovering near all-time highs, but plenty of individual stocks are being crushed by year-end selling. Some examples: *--*

1995 Thurs. Pct. Stock high close drop Nokia Corp. A $78.00 $35.50 -54% Dell Computer 49.38 32.25 -35% Tellabs Inc. 52.75 36.75 -30% Motorola 82.50 57.38 -30% Georgia-Pacific 95.75 67.88 -29% Limited Inc. 23.25 17.25 -26% Circuit City 38.00 29.25 -23% Hewlett-Packard 96.63 78.13 -19% W.R. Grace 71.63 58.63 -18% Ford Motor 32.88 28.38 -14% TRW Inc. 82.63 74.13 -10% Hercules Inc. 62.25 56.75 -9%

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All stocks trade on NYSE except Dell and Tellabs (Nasdaq).