Three views from the stock market's crystal ball
New York Times
Is this time different?
As stunning as the past week's stock decline was, the answer to the question remains what it has always been: Nothing has changed -- unless, of course, it has.
Three strategists, interviewed after the Dow Jones industrial average dropped nearly 300 points on Tuesday, shared their views.
Sky is falling
If the sky truly is falling, don't tell Robert Froehlich, 45, chief investment strategist for the mutual fund group of Scudder Kemper Investments, that he failed to give you the heads-up.
The tremor on Tuesday, he said, was more than just the ordinary dip-and-rebound script that has played out so routinely over the last several years. ''I think there's a confluence of some pretty unique events causing this downdraft,'' he said.
First, Froehlich said, simultaneous crises of confidence threaten the governments of the world's two biggest economies -- the United States and Japan -- giving investors already skittish over earnings, for example, one more reason to rush the exits.
But don't downturns always lure bargain hunters? It may have seemed that way for the last 10 years, Froehlich said, but one ingredient is now missing. ''The buying opportunity usually comes after you have an economic release the market can rally around,'' he said. ''Now, there is no economic release to rally around.''
The importance of having some good economic news to cling to, he continued, helps explain why European markets have outperformed lately (though they did tumble on Wednesday, in sympathy with the Dow's slide). ''Europe is doing better than most because they have a great rallying point, the creation of a common currency,'' he said.
Froehlich advises a defensive posture but feels that consumer confidence should remain strong. He recommends the drug, food and homebuilding sectors, plus financial stocks that will benefit from low interest rates.
Almost a crisis
Sam Stovall, 43, sector strategist at Standard & Poor's, thinks investors will look back on this period as the crisis that almost happened.
He acknowledges that the trouble spots are significant. If the Dow were just ''bouncy,'' Stovall said, it would have turned north at 8,600, where it has rebounded in the past. Instead, it crashed right through that psychologically important level.
Previous corrections of 5 percent to 10 percent since 1990 have involved mainly small- and mid-cap stocks, leaving blue chips aloft, Stovall said. Now, by contrast, ''we are hearing companies that were Wall Street darlings caution analysts that forward earnings could be difficult.''
In the past, he continued, it was just the fundamental analysts, those focusing on corporate financials, who were worried about excessive price-to-earnings ratios, low dividend yields and the like. Now, technical analysts are looking at ominous signals like the increasing number of stocks on the New York Stock Exchange that are hitting new 52-week lows.
Despite that, Stovall said, the market has a guardian angel: low interest rates. ''I think in order for this market to really tank,'' he said, ''the Fed has to raise interest rates.''
With low rates providing a cushion for stocks, Stovall said, there is no reason to change his picks. ''I still favor the consumer cyclicals, health care and selected technology issues,'' he said. ''But if investors are nervous and want to look to those sectors that have held up best in market pullbacks, I would look to the consumer staples -- food, beverage, tobacco and household products -- as well as utilities.''
Sell off old news
To Chuck Clough, 56, chief investment strategist at Merrill Lynch, the perception that we were in a bull market before last week's fall was illusory.
Though it may come as a surprise to people, a market sell-off has been under way for months, Clough observed.
''The Dow Jones industrial average is only up about 4 percent from where it was last July,'' he said, adding that investors have been focusing for the last year on 15 to 20 stocks that have powered the S&P 500-stock index and created the perception that the market was stronger than it was.
The problem, Clough said, is over investment -- the Asian crisis being only the most severe symptom.
Investment will slow as some of the easy capital sloshing around the world dries up, Clough predicted, but that is not as bad as it sounds. ''The positive is, if that's true, inflation is going to be astoundingly low as we go into 1999.''
In addition to financial stocks, Clough would like to see his firm's clients holding a handful of very high-quality companies, because he thinks the rest of the market will tread water for the foreseeable future. And don't skimp on bonds, he said, because this is no time to be holding an unbalanced portfolio. <Picture>
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