SOME INVESTORS are scared of future earnings drops. Some think the economy won't recover. Some lost so much money in technology stocks and mutual funds that they're frozen in place.
How nice. The more investors worry, the warmer the climate for buying stocks. The tax cut will soon be putting a little extra money into consumers' hands. And the Federal Reserve's aggressive interest-rate cuts are working their way through the economy.
Still, the market remains a good news/bad news story.
"Value stocks" are the good news. These are companies whose stock prices were beaten down. Maybe their industries got into trouble. Maybe they had poor management or made a bad business guess. Investors are snapping up any firm whose business is looking up. Smaller value stocks are doing especially well.
"Growth stocks" make up the other half of the market. In recent years, investors tumbled for growth stocks, heart and soul. These companies report earnings that are growing fast. Until about a year ago, they were leaving value stocks in the dust.
Suddenly, value stocks pulled ahead of growth stocks in the fastest turnaround I've ever seen.
One way to measure value vs. growth is through the Barra indexes. The Barra Value Index comprises the companies in Standard & Poor's 500-stock index with a high book value relative to their stock price. In other words, they carry a price that's relatively low.
The Barra Growth Index is the other half of the S&P 500, with a low book value relative to price. So stock prices are relatively high.
Starting in 1989, growth stocks gained ground on value stocks. In the late '90s, everyone had to own Cisco and Sun, even when they had no clue what those companies did. (Cisco makes routers and switches - do you know what for?)
When the tech bubble broke in early 2000, the market took a ferocious turn. Value stocks made the greatest gains on growth stocks ever. The value index rose more than 7 percent in the past 12 months. Growth stocks are still off by 25 percent, even counting their recent gains.
That's the bad news. The plunge in growth stocks was so profound that the index has lost all its relative gains of the past five years! If you'd held only growth stocks since May 1996, you and a value-stock holder would now have the same results.
Investors got excited when the techs and telecoms rose in the April-June rally. But viewed from Nasdaq's 5,048 peak in March 2000, these stocks are just partway up the basement stairs.
So far, investors have hugged their tech stocks during the entire wipeout - dreaming of a total comeback. They also kept most of their shares in the aggressive-growth mutual funds that specialize in techs.
James Bianco of Bianco Research in Barrington, Ill., estimates that fund investors are holding unrealized losses in the $80 billion range. For you to break even, he says, the Nasdaq would have to rise to 3,600, which is still a long way away.
Should you hold longer? No, says James Stack of InvesTech Research in Whitefish, Mont. "Historically, bubbles don't pop and reinflate." When the tech boom of the late 1960s went bust in 1970, many of those stocks didn't hit their final bottom until 1974.
Nevertheless, there's an argument for buying (or holding) growth funds and techs.
You're supposed to "rebalance" your investments from time to time. That means selling stuff that's hot and reinvesting the proceeds in sectors that fell behind. Growth-stock mutual funds have definitely fallen behind.
Still, value stocks remain the story. Bianco plugs oil refiners, because they're selling gasoline and heating oil at high margins over the price of crude. Scott Anderson of Economy.com likes construction, steel, retail and financial services. You can own them all in value-oriented mutual funds.
Last year, these companies were dismissed as Old Economy stocks. Now, they're new again.
Washington Post Writers Group