If it were released as a film this summer, the title might be "Last American Bull Market" or "Sleepless on Wall Street."
Here's the plot:
An overpriced stock market comes crashing down on terrible economic news. There's a wild panic by novice investors who have just transferred their money into mutual funds from conservative bank certificates of deposit. They pull their money from the funds, sending fund companies into chaos and accelerating the market plummet.
Sound far-fetched? Well, no, not if you listen to some pundits who have been repeating that worst-case scenario to anyone who will listen.
If you pay attention to cooler heads, you'll hear that the market still has room for growth as it continues to capture money-market and bank dollars. In addition, investors may not be quite so quick to panic as suspected.
"It doesn't take a rocket scientist to realize this market is expensive, fueled by mutual funds and some foreign buyers," said Eric Kobren, editor of the Fidelity Insight investment letter, which tracks funds of Fidelity Investments.
"However, there's still $2.7 trillion in low-yield money-market funds and CDs, indicating more money will be coming into stocks and stock mutual funds because there's nowhere else to go."
An investor in mutual funds is more likely to stay put in a market correction than is a holder of an individual stock, Kobren contends. In addition, mutual fund companies are better-prepared than they were in 1987 because they use hedging strategies and have higher cash levels to cover potential payouts.
Not that this is an easy market.
"It's getting tougher to pick stocks these days, so my recommended list consists of only 84 stocks, rather than the 214 of last fall," said Louis Navellier, editor of the MPT Review investment letter, who zeros in on special situations and niche companies.
"However, I have no fear of a big market collapse, since trading volume is relatively light, and there's still a lot of cash on the sidelines."
A significant market downturn doesn't seem probable right away.
"We're overdue for a market decline, but it's not likely over the summer, since you'd probably need an increase in three-month Treasury bill yields to 3.5 or 4 percent to trigger a 10 percent market decline," said Eric Miller, portfolio strategist for Donaldson Lufkin & Jenrette, whose current model portfolio is 50 percent stocks, 40 percent bonds and 10 percent cash.
A correction might actually be healthy and wouldn't signal the end of the world.
"It's become more challenging to find individual stocks, for I see limited upside or downside to the stock market as we remain in a trading range," observed Marshall Acuff, portfolio strategist for Smith Barney, Harris Upham & Co., whose model portfolio is 50 percent stocks, 35 percent bonds and 15 percent cash.
"But while there would be some additional selling in a market slide of 100 points or more, individuals learned in the 1980s that if the market goes down, it comes back again, and they may use a downturn as a buying opportunity."
Kobren, now "relatively defensive," recommends Fidelity Value Fund, up 11.1 percent this year; Fidelity Equity Income II, up 11.2 percent; and Fidelity Balanced Fund, up 13.5 percent. In bond funds, he likes Fidelity Short Term Bond Fund or Fidelity Spartan Short Term Bond Fund. (An annual subscription to Fidelity Insight, P.O. Box 9135, Wellesley, Mass. 02181, is $177 for 12 issues and an investment hot line.)
While steering clear of biotech, technology and some software companies, Navellier recommends shares of Cheyenne Software, maker of software for computer networks; DFC Communications, a growing company with huge contracts from U.S. West; and Newbridge Networks, a maker of digital networking products. (An annual subscription to MPT Review, P.O. Box 10012, Incline Village, Nev. 89450, is $225 for 12 months.)
Favorites of Miller include natural-gas stocks such as Enron Corp.; insurance firms like American International Group Inc., Chubb Corp. and MBIA Inc.; banks such as Citicorp and Bank of Boston; and capital goods firms such as Ingersoll-Rand Co. and AMP Inc.
Acuff recommendations include General Electric Co., United Healthcare Corp., Burlington Resources Inc., Capital Holding Corp. and Caterpiller Inc.