Market Outlook: The Bear and the Bull Perspectives
Buy? Sell? Hold?
As any stock market investor who has read a newspaper or tuned in to CNBC lately knows, there’s a lot of conflicting advice out there.
The bulls say that bear-market talk obscures opportunity: They say there are plenty of attractively priced “value” stocks to pick from outside of the technology sector, and that the broad market could be near a bottom as investor optimism wanes and further interest rate cuts appear likely.
But the bears say tech stocks, in particular, are still grossly overpriced, noting that price-to-earnings ratios remain relatively high because corporate profit estimates have tumbled in tandem with share prices.
Skeptics also say bear markets can require more time to work out previous excesses. The Nasdaq composite index is only a year past its speculation-driven peak, the bears point out; other speculative bubbles--Japan in the late 1980s, for instance--have taken a decade or more to work through.
“The mantra these days is still ‘Just hang on and you’ll always do well in stocks,’ ” said Robert Shiller, a Yale University economics professor and author of “Irrational Exuberance,” published last March. “That’s the same mantra they were using in the 1920s.”
Even though the tech-heavy Nasdaq composite index has sunk more than 60% from last year’s peak, P/Es on many Nasdaq stocks still are astronomical, he noted. “You really have to believe in growth [long term] to be buying here,” he said.
The P/E ratio for the blue-chip Standard & Poor’s 500 also is high by historical standards, though it has dropped to about 21.5, based on current estimates for 2001 earnings per share. But at the last bear-market bottom, in 1990, the S&P; P/E was 14.
A key question, too, is whether analysts still are overly optimistic about earnings for 2001.
Longtime bear James Stack, president of Whitefish, Mont.-based InvesTech Research, said valuations aren’t the market’s only problem.
“Margin debt is still high as well,” he said, referring to investor borrowing to buy stocks.
“But the real problem is that we haven’t seen the psychological washout that normally comes at market bottoms,” Stack said. “Usually you don’t get a bottom until there are a lot of recession headlines in the media.”
Stack said such a bottom could come in the next couple of months, but he warned that investors, especially those buying pricey tech stocks today, may wait a long time to make any money.
He likened the U.S. bull market of the late 1990s to Japan during the mid-’80s, the gold fever of 1981 and the early 1970s on Wall Street, when investors thought the so-called Nifty Fifty growth stocks were invincible. The Nifty Fifty craze preceded a 21-month market rout, he noted. And gold and the Japanese market remain sharply down from their peaks.
Shiller pointed out that investors unlucky enough to buy at the peak of 1929 required 25 years to get back to break-even, based on the Dow Jones industrial average.
So much for the bear case. Some money managers say that, at times like this, investors have to think of Wall Street as “a market of stocks” rather than as a stock market. In other words, focus on individual issues, especially nontech names, where the fundamentals look promising.
“We take the long view, so all a decline like this does is make certain companies look even more attractive,” said Warren Isabelle, whose ICM/Isabelle Small Cap Value fund has gained 5.8% year to date. He noted that valuations of small-company stocks look cheap compared with the S&P; 500.
Issues he favors include 4Kids Entertainment Inc. (ticker symbol: KDE), which licenses Pokemon and other products; the trucking company Consolidated Freightways Corp. (CFWY); and Scios Inc. (SCIO), a biotech firm whose drug for treating congestive heart failure is under FDA review.
Manager William Nygren, whose mid-cap value funds Oakmark and Oakmark Select, are up 8.4% and 10.3% year to date, respectively, pointed out that the S&P; 500’s P/E is in the low teens if the tech components are removed.
His holdings include financial services giant Washington Mutual Inc. (WM), retailer Toys R Us Inc. (TOY), consumer product maker Fortune Brands Inc. (FO), tax preparer H&R; Block Inc. (HRB) and supermarket chain Kroger Co. (KR).
Many growth-oriented managers also express optimism.
“I think valuations have come down to more reasonable and sustainable levels,” said Nick Calamos, whose Calamos Growth fund is down 9.2% this year.
He said he likes consumer-oriented stocks such as Reebok International Ltd. (RBK) and Royal Caribbean Cruises Ltd. (RCL), which he said could benefit from another rate cut by the Federal Reserve as well as a potential tax cut.
An investor’s time horizon is the key issue at a time like this, said Scott Cooley, senior analyst at fund tracker Morningstar Inc.
If you can’t afford to hang on to a stock or mutual fund for at least two or three years, think twice about buying, he said.
Conservative mutual funds he likes include Fidelity Asset Manager, a domestic hybrid fund that holds bonds and cash as well as equities; Washington Mutual Investors, a large-cap value fund, or any of its siblings from the American Funds family; and Dodge & Cox Stock, also a big-cap value fund.
For investors with a longer time horizon or more appetite for risk, Cooley likes Vanguard Growth Equity and Janus Mercury. Both invest in large-company stocks.
