Los Angeles money manager Robert Rodriguez is a big believer in a number of retailing stocks, including arts-and-crafts chain Michaels Stores Inc., close-out retailer Big Lots Inc. and jeweler Zale Corp.
But the heavy presence of consumer-dependent stocks like those in Rodriguez’s FPA Capital mutual fund recently caused one of his clients to question the manager’s logic. If the war in Iraq goes badly, Rodriguez recalls the investor telling him, consumers’ confidence -- and spending -- could collapse. What then, the client asked?
Then the economy as we know it may implode, and it may not matter what investments you own, Rodriguez, a 30-year veteran of financial markets, said he told the client.
“If you don’t plan on that, then you should be buying stocks,” Rodriguez said.
His response is becoming a more common refrain among money managers and Wall Street strategists. Faced with extraordinary uncertainty -- and extraordinarily anxious investors -- some market pros are in effect throwing up their hands. They are asking clients to make one of two bets: Either things eventually will get better, or the future is so dark that all questions about markets are moot.
Steve Galbraith, portfolio strategist for brokerage Morgan Stanley in New York, this month wrote a report lambasting some of his Wall Street peers for focusing on “Malthusian extremes” in evaluating markets and the economy.
If one believes the hype, Galbraith said, “the entire U.S. population is about to file for Chapter 11 ... no company will generate enough cash flow to ever reward shareholders, pension funding issues will bankrupt the country, and pigs will fly well before a single U.S. company raises prices again.”
He acknowledges that it is unsurprising that investors have a hard time feeling confident, given three years of heavy blows -- including the technology stock crash, the terrorist attacks, last year’s wave of corporate scandals and now the war.
But gloomy investors are painting with too broad a brush, Galbraith maintains. And historically when that has happened, the markets have offered substantial opportunities for people who can take a longer-term view, he said.
That is, of course, one of Wall Street’s favorite come-on lines. But to FPA’s Rodriguez, it’s gospel. He buys stocks to hold for years, not months, he said. So when share prices of his favorite companies fall sharply -- as they have in recent months for firms including Michaels Stores and Big Lots -- that is an invitation to get in cheap, he said.
If Western civilization isn’t nearing its terminus, then the economy eventually will improve and so will the outlook for well-run firms that are leaders in their industries, Rodriguez said.
More investors appeared to take that same view just before, and just after, the war began. The Dow Jones industrial average rocketed 8.4% in the week ended March 21, the biggest weekly gain since 1982. That lifted many stocks from levels that were close to last year’s five-year lows.
But confidence waned anew last week. For the five days the Dow lost 376.20 points, or 4.4%, to end Friday at 8,145.77.
As the war has bogged down, so have markets. The conflict is raising risks that many investors can barely begin to process mentally. Is the nation prepared for heavy casualties? What happens if Iraq’s neighbors, such as Iran, are pulled into the fray? Even assuming a U.S. military victory, will there be a long-lasting global backlash against America and its companies?
“If you’re looking for reasons not to invest, you can find them all over the place today,” said Jack Ablin, chief investment officer at Harris Trust & Savings Bank in Chicago.
This is hardly the first time the nation has been confronted with a seemingly monumental challenge. The economy survived World War II, the Korean War, the Vietnam War. It survived rampant inflation in the 1970s and huge federal budget deficits in the 1980s.
People cope, and they move along. Consumer and business spending are nothing if not cyclical. Weakness ultimately gives way to strength -- or always has.
Some market pros argue that there are few extended discussions these days about the positive fundamentals underpinning the economy -- the continuing repair of corporate balance sheets, for example, and the healthy finances of many consumers.
Those discussions have become a casualty of war, said Ned Riley, chief investment strategist at State Street Global Advisors in Boston.
“At times like this, it’s extremely hard to focus on economic and stock market issues,” he said. A good investor, he noted, should show objectivity, counterintuitiveness and a lack of emotion in approaching buy and sell decisions. But that’s asking too much of people when the backdrop is war, Riley said.
It is far easier for investors to continue piling up cash in short-term accounts, even if they know, deep down, that that is probably the wrong move if they can imagine a better economy and market five years hence.
Ablin, who oversees $40 billion, says he can understand why many individual investors would choose to keep their money in safe accounts, even if they are earning almost no return there.
“If I were one of the people on the sidelines, I wouldn’t invest in the stock market at the moment,” he said. The war presents risks beyond the ability of most market pros to fairly judge, Ablin said -- for example, that the conflict could be the catalyst for the global economic collapse that doomsayers have been predicting since the Depression.
That isn’t what Ablin expects. Nonetheless, he said, “the downside risk, even though less likely, can be a lot harsher than the upside potential from here.”
Steve Hochberg, chief market analyst at investment research firm Elliott Wave International in Gainesville, Ga., qualifies as a doomsayer compared with most Wall Street strategists. He believes that stock prices are headed significantly lower in the years ahead.
Contrary to what some market bulls are arguing, however, a bearish view today isn’t a bet on the world’s end, Hochberg said. The issue is simply that stocks still are priced too high for the earnings that companies are capable of generating, and for the various risks facing the market and the economy, he said.
That has been the right view for three years. It will be the wrong view -- someday.
Tom Petruno can be reached at email@example.com.