Stock market seems fully valued

December 01, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Fully valued. That's how many Wall Street investment strategists are labeling the stock market lately.

It dodged a bullet when the North American Free Trade Agreement was approved by Congress. Even though positive economic aspects won't be immediate and there will be some negative impact, a dramatic market drop was expected had NAFTA failed to pass.

Still, there remain plenty of other worries on the agenda.

The high-flying market has already factored in prospects for an improved 1994 economy. But it now faces upward pressure on interest rates, plus the stress of increased taxes and the federal deficit-reduction program. Meanwhile, any significant gains in corporate profits are expected to come primarily from painful improvements in productivity.

All of which seem to put a lid on stocks, making chances of a correction greater.

Many strategists wasted no time backing away from the electric-utilities group. Likely to be hurt by modestly higher interest rates, the group is already facing a tough regulatory environment and increased competition. Oil-company stocks or short-term bonds are being recommended as investment alternatives.

"We may actually be in a little correction right now," said David Shulman, chief investment strategist with Salomon Brothers Inc. "I'd stick with companies in basic industries, with capital-goods companies in particular likely to benefit from NAFTA since they'll make the machinery that will be used to produce more goods in overseas factories."

Real optimism is hard to come by. "The stock market has seen its high for the next six months, and a correction has begun," said Michael Metz, chief investment strategist for Oppenheimer & Co.

Even good news is sometimes actually bad news.

"All the persistently good economic news means interest rates have finally bottomed out," said Greg Smith, chief investment strategist with Prudential Securities. "We didn't go down the wrong path with NAFTA, but the market has nonetheless reached a classic juncture that will keep it from rising."

The market is facing additional change due to tax laws that favor capital gains over income, says Marshall Front, senior executive vice president of SteinRoe & Farnham, with $8 billion in mutual funds under management.

"Under the new law, people will seek capital gains, not income, so growth stocks with capital appreciation will become more popular," Front said. "Their growth rates of 12 to 16 percent will also look attractive in this generally slow-growth economy."

On the negative side, Front expects a 5 percent to 7 percent market correction in the next year or so, probably when the market is at a higher level than it is now.

Investors must be choosy. For example, U.S. car companies should benefit from the probability that Japan will be less competitive than it was in the '80s, so General Motors stock is recommended by Smith and Shulman. Ford Motor and Chrysler are also suggested by Smith, along with Varity Corp., a supplier of ABS brakes and diesel engines.

In transportation, Consolidated Rail and Santa Fe Pacific are Smith picks, as are air carriers American Airlines and Southwest Airlines. Credit-card processors like First Financial Management should eventually benefit from changes in credit procedures for health-care plans, he said.

The likelihood of drastic health-care changes may have been overdramatized, Metz believes, so he likes Bristol-Myers Squibb, Merck, Pfizer, Upjohn, Syntex and Abbott Laboratories.

In tobacco, Philip Morris Cos. and American Brands are good bets, he added, while food companies H. J. Heinz and CPC International should also prosper.

With the population aging, the life-insurance firm Jefferson-Pilot and the banking company First Chicago Corp. are other Metz picks.

Cyclical firms are looking stronger. Basic-industry companies like Parker-Hanifin, Eaton Corp., Ingersoll-Rand, Georgia-Pacific and PPG Industries should do exceptionally well, Shulman believes.

Small-capitalization stock funds and overseas-stock funds should outperform other investments, Front said. The difficulty of tracking small stocks and the equities of foreign countries makes mutual funds the best means of capturing this play. Mutual-fund companies like SteinRoe & Farnham are already profiting from this trend and attracting new money.

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