Talk of The Street
Excerpts from current market commentary by analysts at major and regional brokerages, editors of investment newsletters and portfolio managers
David Shulman, chief stock strategist, Salomon Bros., New York
The primary risk to the market stems from the November elections. A Democratic majority in Congress will revive budgetary concerns, especially with regard to entitlement reform, in both equity and bond markets. In spite of negative earnings surprises such as Raytheon, Albertson’s and Pharmacia & Upjohn, corporate earnings continue to grow at a modest pace, with companies such as Johnson & Johnson, Illinois Tool Works, First USA and Schlumberger beating analyst estimates. Intel and Compaq reported earnings well above expectations, indicating renewed strength in the technology sector.
The Standard & Poor’s 500 index is up an impressive 7.4% since Labor Day and is poised for a [further] rise with continued growth in earnings and a favorable interest rate environment. We expect that such an upswing will be led by a narrow group of stocks with proven growth and high stability. We continue to recommend companies such as PPG Industries, General Electric, Johnson & Johnson and Schlumberger.
Arnold Kaufman, editor, S&P;’s Outlook newsletter, New York
It’s hard to be comfortable with so relentless a climb [in stocks] from already elevated levels. Valuations are now generous. The price-to-earnings ratio of the Standard & Poor’s 500 index using our estimate of earnings for the 12 months through Sept. 30 is 19.5. On the same basis, the P/Es at four of the six postwar bull market peaks were below the current ratio. At one market top, in January 1973, it was also 19.5. Only at the August 1987 peak was the P/E higher, at 23.2.
It’s difficult, meanwhile, to imagine background conditions staying so conducive to stock gains. Corporate profits will continue to rise, but at a decelerating pace. With wage pressures growing, the chances of some pickup in inflation seem to be better than of an easing. And our economist believes that the yield on the 30-year Treasury bond [now about 6.8%] is more likely to hit 7.25% over the next six months than 6.25%.
Be prepared to shift quickly, but for now stay with a portfolio allocation of 55% stocks, 30% bonds and 15% cash reserves.
Robert Markman, Markman Capital, Edina, Minn.
We believe we are at, or very close to, a secular major top [in the U.S. stock market]. The signs are unmistakable: excessive positive sentiment, an earnings slowdown, [the fact that] the current level of returns on stocks are statistically unsustainable and the presidential election cycle. With very few exceptions, the first year of a president’s term, especially a reelected incumbent, is by far the weakest of the four years.
We do not expect an apocalyptic market decline. [But] we believe it is foolish to remain aggressively invested in U.S. equities in an effort to greedily capture the last few percentage points in this market. Our recommendation: Diversify more overseas, with particular emphasis in European stocks; eliminate aggressive U.S. small-stock funds or reduce them substantially; increase allocations to lower price-to-earnings ratio, stable-value funds; create a cushion uncorrelated to the U.S. stock market, with funds like Northeast Investors Trust [a high-yield-bond fund] and increased cash levels.
Eric Miller, chief investment officer, Donaldson, Lufkin & Jenrette, San Francisco
This is the longest bull market ever; the percentage gain is second only to the period from 1923 to 1929; we have never gone so long without a 10% correction [in blue-chip stock indexes]; and 87% of all the cash inflows to equity mutual funds, ever, have come in since 1990. [Yet] these benchmarks and the many others aren’t fostering major forebodings among the institutional clients with whom we talk. Despite the extraordinarily long period of unusually high annual returns on stocks going back to 1982, we find very few clients anticipating an early and ugly end.
We see slower [economic] growth and less satisfactory [corporate] earnings than most others do for the coming year. Is that the stuff of a major bear market? No, we expect that more downside volatility may show up than the tiny twitch that represented the May-to-July correction, but [we don’t see] the end of the secular bull market. We continue to feel that that would require a significant credit tightening or liquidity squeeze, which doesn’t seem on the horizon.
--Compiled by Times staff writer Tom Petruno
