Analysts discuss what's in store for rest of year

SUNDAY OUTLOOK

July 17, 1994|By David Conn

The first half of the year was a trying time for most investors.

By the end of June the Dow Jones Industrial Average had fallen nearly 9 percent since its high of 3,978 at the end of January.

In the last few weeks it regained 3 percent and after a 14.6 point surge on Friday, it now stands at 3,754.

While the economy's continued strength during the first two quarters might have implied a stronger market, the Federal Reserve Board's decision to tighten monetary policy through higher interest rates in order to head off inflation has sent both the bond and stock markets into convulsions. Not all industries have performed evenly.

Which ones outperformed in the first half, and which lagged? And where should smart investors put their money to work in the second half?

Jeffrey Saut

Director of research Ferris Baker Watts Inc.

What we had from the end of January to the end of the second quarter was basically a downside bias. But you did get a bunch of people at the end of the quarter [selling stocks] and leaving the market oversold. So at the end of the quarter you had a pretty decent rebound.

The rising tide, however, has not lifted all ships. It's been a very selective rally. The Dow has fared better than other indexes because it's very heavily weighted with cyclical stocks.

I still think the cyclics will fare better than most, because I do think the economy will grow faster than most think.

I think the companies that benefited in the 1980s from declining raw material prices, and yet could raise their price to the consumer, thereby widening their profit margins, should be avoided.

The public is not taking price raises and yet the prices of their commodities are going up.

Things like General Mills, Kellogg, Pepsi -- names that have benefited from the disinflation, deflation theme.

In business school they tell you that the minimum asset allocation of stocks, even if you're very conservative, should be 25 percent.

I personally am much more invested than that.

For years you did better off by buying Treasury bills and letting your money sit.

Now you do better by taking your money and buying an automobile plant, productive things, stuff.

Alfred Kugel

Senior investment strategist Stein Roe & Farnham Inc. in Chicago

The bottom line is that the economy has been stronger than expected, and so some of the more economically sensitive areas in the market have done better than we and a lot of other people suspected.

Not so much autos. One of the worst areas has been housing.

The thing that's been a big surprise is the size of the increase in long-term interest rates. We've had almost a two percentage point increase since last October. The place where it hits the most is in single family housing. It's ended refinancing, and it's also slowed down single-family starts. I think that's an area that's been soft and will stay soft.

Cyclical stocks have been out performing the market more or less since the end of 1991, and growth stocks have been the trailers of the market, the laggards, and the financial stocks have kind of been in between.

If indeed long-term rates start to come down, I think some of the financial stocks will start to do better.

If the economy really slows down, then all of a sudden the earnings expectations for the cyclical stocks may not be as buoyant as is now reflected in their prices. If the real factors suggest a slowing in economic growth and therefore a slowing in the rate of earnings increases in those companies, I think the pendulum will swing back toward growth stocks.

James Haynie

Co-manager Colonial Small Stock Fund in Boston

In the first half of the year, the biggest surprise I think was the weakness in cyclical type industries and sectors, primarily driven by the surprising rise in yields.

Even though the auto, the textile and housing stocks continue to produce good earnings, I think people have jumped the gun by saying higher interest rates are going to choke off demand and people aren't going to buy houses, so let's dump the stocks.

The best performers have been some of the basic nonprecious metals, as we've seen a lack of supply and increased demand. So the coppers and aluminums and steel all did pretty well in the first half of the year.

The autos and some of the housing-related stocks declined based on everyone's expectations of lower earnings, yet the data we've seen so far have suggested that if it's going to happen it hasn't happened yet. So the hard facts are still very positive. I wouldn't be surprised to see the interest-rate-sensitive stocks [do better].

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