The animals on Wall Street shuffle to a slow, indecisive beat
The full market menagerie is loose. The bears are out of hibernation. The bulls, well, they have perennial grazing rights. And nowadays there seem to be quite a few hybrid beasties mucking about Wall Street. A splendid sight if you're a zoo-goer. But this kind of variety makes for a trendless-to-dismal stock market. Witness the vacillating four-day pre-Easter week, when the Dow Jones industrial average muddled to 1,259.05, down 7.73 points in light trading.
A rough sketch of today's investor mix can be drawn from the sentiment gauge compiled by Investors Intelligence, a newsletter written from Larchmont, N.Y. The latest survey shows 50.5 percent of investment advisers are bulls (down from 64 percent in March), 22.5 percent are bears, and 27 percent fall into the hybrid group calling for a short-term correction.
Editor Michael Burke says his barometer (which is viewed by many market analysts as a reverse indicator) has been signaling a 100-point correction in the Dow. The Dow industrials have given up about 40 points since late February. Another 40- to 50-point drop could be in the offing, Mr. Burke says.
William J. Gillard would not be surprised. This director of investment policy says the folks at Kidder, Peabody & Co. didn't wake up with a growl just yesterday. ``We've been on the bear side for some months now.'' Lately, he has had more company as signs of economic problems become more apparent.
``A growing number of companies are disappointing investors [with weak earnings reports]. If enough individual companies disappoint, then those micro numbers become macro, and that has a negative effect on the market.''
The poor first-quarter earnings rolling out can have a dampening effect on investors' desire to buy stocks. Investors get concerned about what second- and third-quarter earnings will be like.
Meanwhile, interest rates have been winding slightly upward in the past two months, making fixed-income securities more appealing. And in March, fixed-rate mortgages edged up for the first time in eight months. If this trend continues, office and housing construction could slow. On the other hand, adjustable-rate mortgages declined a bit.
The mixture of reports makes for difficult analysis and guarded investing. Mr. Gillard describes the uncertainty of investors as very similar to that before President Reagan was reelected. The ebullience in January was ``misplaced.'' Contrary to expectations, quick action on the budget has not been forthcoming. ``Reality shows fiscal changes come slowly. We're back to a market environment where it is difficult to do well,'' he says.
His stock purchases consist of growth retailers, drug companies, and a couple of utilities. Attention is focused on defensive issues, ``the safer stuff.''
But even a self-avowed bear has a pair of horns in his top drawer -- just in case. ``You could always have a rally,'' Gillard says. ``If prices drop below 1,200, we could change our mind. And it's not inconceivable that we'll get some good news on fiscal policy.''
Indeed, the bond market took off in the closing hours last week when news reached the trading floor of a Reagan-approved GOP budget compromise plan trimming $52 billion. If chances of congressional passage appear likely, the stock market this week could take its cue from the bond market.
If so, Roy M. Blumberg, who directs portfolio strategy at the Advest brokerage in Hartford, Conn., would not be too surprised. He's something of a near-term bull, longer-term bear: ``We're getting close to the end of this correction. We've been looking for a pullback to 1,247, so the downside risk is minimal now.''
Mr. Blumberg says, ``I'm a great believer in buying when the news is the worst.'' He relishes the opportunity presented by the current pessimism resulting from low earnings and rising interest rates. ``Everybody is downgrading, planning on earnings being so bad. I think you will see some pleasant [earnings] surprises.''
He looks for a broad rally to 1,400 by the end of this quarter. But his optimism for the second half of 1985 wanes. So he's been scratching the defensive issues (banks, insurance, and food) from his buy list, relegating them to a hold position. He wades into some weaker-priced stocks, with aluminum, computer and business equipment, semiconductors, rails, and truckers on his buy list.
``Too early for semiconductors,'' opines Patrick P. Kildoyle, who manages four mutual funds at First Investors Group in New York. He notes that the National Semiconductor stock price has been halved, but based on past lows he thinks it still has a ways to fall.
Mr. Kildoyle rounds out the investor profile with a patentedly bullish outlook. Discarding the near term as relatively irrelevant, he focuses long term: a Dow of 2,000 within three years. Or as he puts it, the Dow should mirror the calendar year -- 1,987.
``Share prices in America [he manages an international fund, too] are incredibly undervalued. The Dow stands at 1,260 as I speak. In 1966 it hit 995. In two decades stock prices have moved up little more than 25 percent. The stock market is way behind real estate -- all other investments. It's due for a `re-rating,' as they say in Europe,'' Kildoyle comments.
Falling interest rates over the next year will trigger the rally, he says. While the next rally will be broad based, in his opinion, small-capitalization stocks will be in for a speculative binge in the next six or seven months. Kildoyle says every couple of years the over-the-counter stocks cycle through a speculative bubble. ``First mainframe [computer manufacturers], then peripherals, then software, and soon bio-technology. The bio-tech genetic engineering stocks will see a substantial blowup on the upside followed by substantial losses,'' he predicts.
He plans to play the bio-tech upside, even as he's investing on the oil company downside. ``Many of the energy service companies are selling at 80 to 90 percent of their 1980-to-'81 highs. Everyone is saying that oil will drop $10 or $15 per barrel. We don't think it will. Even if it does, these share prices would be approximately correctly valued.''