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Riding out the storm

By James L. TysonStaff writer of The Christian Science Monitor / July 6, 1999



WASHINGTON

Heavy selling doused stocks in the second quarter, but instead of bringing flowers, the showers left many mutual-fund investors midyear with wet-blanket portfolios.

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Although most major stock indexes and the funds tied to them emerged from the past three months slightly higher, the gains also brought some disillusionment.

Investors sold the sunniest stocks in the blue-sky market - financial, high-tech, and global, high-growth equities. Hoping for a rebound in world economic growth, they bought cheap "value" stocks in cyclical industries and small companies. The appeal of cyclicals briefly pushed the Dow Jones Industrial Average to a new high.

A surge in funds that invest in producers of basic materials like metals, chemicals, and forest products reveals how fears about both inflation and a teetering, high-priced market hold investor moods under the drizzle and out of the sun.

Until such anxieties fade, investors will probably embrace funds in safer, low-price cyclical stocks that would weather well an uptick in interest rates, say analysts.

"Prices are moving in anticipation of improving [global economic] fundamentals," says Sam Stovall, sector analyst for Standard & Poor's in New York. But he adds: "I don't think fundamentals have yet borne out the hope."

Most components of the Standard & Poor's 500 Basic Materials sector rose more than 20 percent during the quarter, with paper and forest products stocks, and aluminum equities surging more than 30 percent and 50 percent respectively. (See story, page 15).

Rising waves overseas

Mutual funds that invest in foreign stocks also rode hints of global recovery upward. Funds focused on Asian markets led the pack, followed by emerging market and European funds.

Meanwhile, the high-fliers of the US equity boom jolted downward. Technology funds lagged, with Internet funds trailing the sector (See story, page 15). Funds that invest in financial companies limped forward. In the cellar were funds that hold health care or consumer staples stocks.

The market was especially jumpy last quarter because of uncertainty over interest rates and inflation, with commodities signaling a broad rise in prices.

The threat of a rate hike by the Federal Reserve helped value stocks at the expense of growth stocks.

"There is a lot of shifting back and forth, depending mainly on how interest-rate winds are blowing," says Mr. Stovall.

"The fear of tighter monetary policy may have already started a gradual correction," says Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Despite the volatility, some analysts were heartened as money flows broadened from the S&P 500 Index stocks that have led the equity boom this decade into low-price, small-company stocks.

Indeed, last quarter funds tied to three different measures of small company stock performance - the S&P Low Price Stock Index, Russell 2000, and S&P Small Cap Index - were among the top performers. Funds devoted to the S&P 500 lagged.

Still, a rotation from growth to value stocks can also signal weakness.

Such changes "on the scale which began on Wall Street during April have often been harbingers of market corrections," says David Hale, chief economist at Zurich Financial Services in Chicago. In five instances since May 1975, a major move from growth to value presaged corrections in the S&P 500 Index averaging 15 percent, according to Mr. Hale.

Rate hikes may not be over