Fund Managers Cheer Cut, Differ on Market’s Future
Equity mutual fund managers were nearly unanimous Wednesday in cheering the Federal Reserve’s surprise interest rate cut, but they were divided about where the stock market is headed.
Like most investors, fund managers were caught off guard by the timing of the Fed’s move, which came well before the central bank’s next scheduled meeting, May 15.
“This is definitely a surprise. A consensus was building that it would happen at the regular meeting,” said Bill Whitlow, manager of Safeco Northwest, a mid-cap stock fund. “But I think companies like Hewlett-Packard and Cisco Systems were making it clear that this economic slowdown was spreading quickly to Europe and Asia, so the Fed almost had to act.”
Managers expressed differing opinions over whether the market has bottomed--and what the leading stocks may be if it has.
“The muted reaction to bad earnings reports from [Cisco and other key tech firms] is like the market saying, ‘OK, the worst is probably over,’ ” said Ross Margolies, manager of Salomon Bros. Capital, a mid-cap value-oriented fund. “But the harder argument to make is that we’re headed for a return to where things were. Sure, the market may rally for the near term, but if business doesn’t improve it’s going back down.”
For one thing, Margolies said, stock valuations are less attractive than they were in late March and early April, when the broad market hit two-year lows.
“Two weeks ago we could buy quality stocks with confidence because prices had gotten so cheap that you could almost be sure of making money,” he said.
But Fritz Meyer, manager of Invesco Growth & Income, a large-cap growth fund, was unequivocally bullish Wednesday.
“Lock and load--this is not a head fake or a rally in a bear market, no matter what Barton Biggs says,” Meyer said, referring to Morgan Stanley’s ever-skeptical investment strategist. “I wonder what kind of rock Barton is living under.”
Meyer noted that in late March the investor sentiment readings he follows got “as close to a bottom as you’re going to ever get”--a classic “contrarian” signal that the market was about to turn.
Reed Bender, manager of Bender Growth, a mid-cap growth fund, agreed, calling the Fed’s fourth rate cut this year “a screaming signal to buy stocks” and noting that equities historically rally six to nine months in advance of improving earnings.
Still, he said, the market could be choppy for a while.
If the market rally does continue, can tech and other growth sectors lead the way they did in the late 1990s? Or will value stocks--those with lower price-to-earnings ratios and lower price-to-book-value ratios--continue to lead, as they have for much of the last year?
“In the last 12 months the rubber band was pulled way toward value, and now it’s ready to snap back,” said Meyer, “so we’re ratcheting up our exposure to tech and telecom equipment.” He also likes growth stocks in the capital-goods area, such as General Electric and Tyco, consumer-cyclicals like Wal-Mart and Home Depot, and energy companies like El Paso Energy Partners and Dynegy.
Whitlow said that on a historical basis the price-to-earnings ratios of many tech stocks now look reasonable compared with expected long-term growth rates. By that reasoning, he likes Tektronix, a testing and instrument company; Intel; Microsoft; and Micron Technology.
But some managers see continuing problems for tech in general.
“I don’t believe tech is going to lead the way out of this,” said Art Bonnel, manager of the mid-cap Bonnel Growth fund. “If it were that easy I’d just load up on tech stocks and my fund would skyrocket, but investing is almost never that easy.”
While tech stocks should get a nice bounce, he said, they will meet so-called resistance from potential sellers. “There’s an awful lot of overhead supply [of shares]. Anyone who bought JDS Uniphase at $150 a share or Cisco at $70 or $80 would sure like to get back to even,” Bonnel said. JDS rose $2.99 to $23.31; Cisco rose $1.27 to $17.93, both on Nasdaq.
Fundamentals also could work against tech firms, some managers said. “You have continuing uncertainty in the business climate and valuations that remain high,” said Glenn Fogle, co-manager of American Century Vista, a mid-cap growth fund. “This could be the inverse of 1999, when anything tech was a great investment and anything not was not.” He prefers energy stocks, which have been among the hottest market sectors of the last year.
“The energy and power sector may be the best business in America right now,” Fogle said.
Burnham Fund manager Jon Burnham said that while he’s “tickled” by the Fed’s cut, it won’t be an overnight panacea for tech. “These companies have to work off their inventory issues,” he said. “It could be late this year before it gets better.”
At least for now, he favors interest-rate-sensitive sectors such as auto makers, builders and retailers.
Some managers said the Fed’s actions are likely to benefit large and mid-cap companies, which tend to carry higher debt loads than smaller firms. But Fogle is among those who expect smaller stocks to continue to outperform: “Large-cap stocks still have the most serious valuation problem. Cisco is sure cheaper than it was, but is it cheap enough?”
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How Key Stock Indexes Fared
Percentage changes in major stock indexes Wednesday and their year-to-date percentage losses:
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Wed. Wed. pctg. YTD pctg. Index close change change S&P; tech 1,058.54 +9.2% -12.8% Nasdaq composite 2,079.44 +8.1 -15.8 Nasdaq telecom 357.42 +7.7 -22.9 S&P;/Barra growth 609.82 +4.6 -11.3 S&P; financials 154.97 +4.4 -5.9 S&P; 500 1,238.16 +3.9 -6.2 Dow industrials 10,615.83 +3.9 -1.6 Wilshire 5,000 11,343.78 +3.8 -6.8 S&P; mid-cap 491.58 +3.4 -4.9 S&P;/Barra value 627.55 +3.3 -1.4 NYSE composite 626.02 +2.8 -4.7 S&P; small-cap 211.81 +2.3 -3.5 S&P; utilities 336.85 -0.3 -3.9
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Source: Bloomberg News
