Times Look Bleak for Investors of Every Stripe
April 21, 2002 08:17 AM ET
By Nick Olivari
NEW YORK (Reuters) - The economy is rebounding from recession, but investors are bracing for a sustained period when stock prices barely move at all and other investments are unlikely to pay off as well.
That doesn't mean that there won't be rallies in certain stocks and sectors. But few money managers are expecting the major market gauges to return to their old highs anytime soon.
In fact, it could be years. Something that long-time investors saw in the 1970s bear market. And prospects for any investing gains look even dimmer now than they did then, experts say.
--Prices of existing bonds are likely to fall when, as expected, interest rates rise later this year.
--Commodities are unattractive, money managers say, since the cost of buying them may not even match anticipated inflation.
--Real estate, a recent safe haven for some investors in volatile equity markets, has no luster for money managers. Prices have risen too far, too fast in recent years making future returns less certain.
During the bleak period from 1970 to 1982, the Dow Jones Industrial Average .DJI had several rallies and declines and at one point lost almost half its value.
"There is a similarity to the (early '70s) where people also got crushed, but today the alternatives to stocks are poor," said Cummins Catherwood, a portfolio manager with Philadelphia-based Rutherford, Brown & Catherwood which oversees $750 million, and a 35-year veteran of the financial services industry.
In the 12-years ended in 1982, the Dow barely posted a 2 percent return on an annualized basis. That compares to a 8 percent annualized return on bonds, 10 percent on real estate, and 22 percent on gold bullion in the same period, according to BigTrends.com, a Kentucky based research firm.
Then interest rates were high enough to make other investments like certificates of deposits attractive, Cummins noted. In 2002, "Interest rates may go up but money market funds pay half as much as the dividend yield on say General Electric," Catherwood said.
The lack of alternative investments is a two-edged sword for stock market investing. On the one hand, it means investors will keep money in equities, providing a cushion of sorts for the market. But it also leaves little incentive for any active stock buying.
Still, fund managers say that selective, long-term investments will pay off, especially if the economy regains its footing in the year ahead as it's expected to do.
"We buy with the expectations of never selling," said Robert Zagunis, a portfolio manager at Jensen Investment Management which oversees $525 million. "We buy companies that are profitable in tough economic times."
Among other criteria, Zagunis seeks companies that have exhibited return on equity of 15 percent or more for 10 years. His picks, include advertising and communication firm Omnicom Group Inc. OMC.N , and credit card company MBNA Corp.KRB.N .
Matt Kelmon, portfolio manager with Palo Alta, Calif.-based Kelmoore Investment Co. told Reuters there will be a few false starts before the economic recovery kicks in, and that individual names will do better than sectors.
His strategy is to buy the stock outright, or go long, then use derivatives to protect the position and potentially increase the return.
No. 1 software maker Microsoft Corp. MSFT.O and home improvement retailer Home Depot Inc.HD.N are Kelmon's top picks.
"The market will trend upward," said Tim Ghriskey, head of Connecticut-based Ghriskey Capital Partners LLC, which caters to high net worth individuals. "But only as the economy recovers." Ghriskey suggests buying economically sensitive stocks seeing the one sure bet as economic growth, albeit moderate.
His picks include raw material companies, like Eastman Chemical Co. EMN.N , diversified manufacturer Honeywell International Inc. HON.N ; as well as some retail stocks like Costco Wholesale Corp.COST.O .
While selective stock picking is seen as a good alternative in the current environment, technology stocks, which have dropped dramatically since leading the last bull market, still are considered by many to be a trouble spot.
Jeff Applegate, chief U.S. strategist at Lehman Brothers, said in a recent note that the sector could fall another 35 percent.
"Since the sector is still 15 percent of the market, that, in turn, would imply a 5 percent drop in market price.
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