Interesting.. Merrill Lynch Shifts its Strategy (5/4/99)
TODAY A N A L Y S I S
iionline.com
by Steve Taub
Good-bye big cap growth, hello small cap value.
That is the word from Merrill Lynch's quant group, which
altered its outlook Tuesday morning.
For starters, it recommended that investors keep 40% of
their assets in stocks. But Merrill suggested that investors
cut their bond exposure from 50% to 30% and put the
difference into cash, which in effect triples to 30%.
Like this Article?
'We wanted to shorten the duration,' explains Kari Bayer, a
Merrill Lynch quant strategist.
The asset allocation revision is very interesting for two
reasons. For one thing, the bond reduction clearly indicates
that Merrill Lynch thinks the recent rise in interest rates will
continue and is not about to peak.
It's also interesting that the bond money wasn't put into the
stock market. The reason: 'Five of our five valuation
models suggest that the market is overvalued,' Bayer notes.
In addition, Merrill's sentiment indicator indicates that Wall
Street market strategists are overly bullish.
Bayer points out that back in October, the market timing
indicator gave a sell signal. Okay, not a perfect time, in
retrospect. Then in March it turned neutral. 'Historically,
over time it has been very powerful,' she adds.
Indeed, in December 1994 it said 'buy.' Same with
December 1996. And it remained very bullish through
October 1997, 'mostly because U.S. strategists were too
bearish,' she explains.
It turned cautious in January of 1998 and became a
full-fledged sell signal in October. 'We're still a little worried
about sentiment,' Bayer concedes.
Meanwhile, Merrill's stock strategy has totally changed.
Merrill has moved from large cap, high-quality growth
stocks to small cap, low quality value stocks. 'The S&P 500
is one big growth stock,' she explains. 'So, we have made a
shift for the first time since January 1995.
What made Merrill shift so dramatically? Well, it seems
that April was the best month for their value portfolio in 15
years. Wow!
'Typically when we see a strong performance, it usually
signals that there is a lot more to come,' Bayer elaborates.
'So, this is the beginning of a value cycle.'
What's the best way to play this new shift? Merrill is
recommending to overweight consumer cyclicals. |
