Wall Street learns how to go forward, stand still, and retreat at the same time
New York — If the admonition of France's Marshal Ferdinand Foch during World War I seems relevant for Wall Street during this particular period, there's good reason: ``My center is giving way,'' lamented the celebrated military hero. ``My right is in retreat; situation excellent. I shall attack.'' More than a few financial houses are recommending just that strategy, given the current doldrums of the marketplace, with trading volume at unusually light levels, losing stocks more often than not edging out winners, and trading gains (in general) few and far between. What exactly should an equity-oriented investor do in such a sluggish environment? More important, are there gains still to be made in equities?
Foch, of course, would say, ``Go forward,'' while still cutting his losses and mounting something of a retreat. Wall Street is now saying essentially the same thing, although financial advisers couch the guarded exhortation in such phrases as ``buy defensive stocks.''
``We're now saying that there are some very good technical opportunities in defensive issues,'' says Richard Bernstein, a capital-markets strategist with Tucker, Anthony & R.L. Day Inc. in New York.
Mr. Bernstein, along with Jeffrey Applegate, who is the chief market strategist at Tucker, Anthony, notes that the firm's asset allocation has moved away from stocks as central banks have tightened money reins in an effort to control global inflationary pressures.
The ``risk-adjusted return is better for bonds,'' the two analysts have just concluded in a report, ``and 1989 earnings expectations appear bloated.''
``Now, we're not forecasting a recession,'' Bernstein explains. ``But we are concluding that the possibility of recession may become a theme within the market because of all the central bank tightening.'' Next year, he adds, will probably be characterized by ``flat-to-down earnings. And we expect some negative earnings surprises.''
The upshot, says Bernstein, is that there are still gains to be made in ``short-term play'' within equities. But that play would best be served by strategic investments in stocks that are ``defensive,'' such as ``credit-sensitive issues, or stocks that involve food and consumer nondurables.'' Best avoided, he says, are ``consumer-durable goods'' stocks that could be hit hard by recession concerns.
Clearly the market is already moving in this direction. Major investment houses are moving from cyclical industrial stocks to such defensive issues as oil and gas drilling businesses to retail food chains and insurance companies.
Still, some market strategists are staying with industrial stocks, particularly given all the election-year talk about creating ``more jobs for more Americans,'' a campaign focus that, if carried out, might put new life into industrial firms for many months ahead. For the week ending Sept. 2, the Dow Jones industrial average closed up 37.16 points, at 2,054.59.
Are there types of stocks - beyond the sector stocks already noted by Bernstein - that can be generically labeled as having ``built-in'' defensive characteristics? The market strategist who comes up with that approach will be able to write his or her ticket to financial success, of course.
One interesting approach - but perhaps one that still warrants some further long-range study, analysts say - has been undertaken by Brandywine Asset Management, in Wilmington, Del.
Brandywine's investment strategy is based on the assumption that ``stocks with low price-earnings ratios seem to have excess returns over time, as well as low market risk,'' says Henry Otto. Mr. Otto is the portfolio manager of Brandywine's structured product group, which includes a small-capitalization portfolio and a large-capitalization portfolio. In addition, Brandywine maintains a portfolio approach based on active management of a smaller group of stocks.
Most of Brandywine's clients, which include such diverse enterprises as Continental Airlines, the Pittsburgh Symphony Orchestra, Union Theological Seminary, and Westinghouse Electric, are included in the latter - active-management - approach. All told, roughly $500 million is under management at Brandywine.
Brandywine tries to forget such factors as the market sector of a particular stock, or seasonability, or such other imponderables, although such concerns are not totally ignored by the fund managers at Brandywine, especially for the active-management portfolio. Still, Brandywine's focus is based on investment in stocks that have not just low, but extremely low, p-e's, the lowest at 25 percent, in fact.
``Over a long period of time,'' Otto says, such an investing strategy outperforms the market. And such a strategy, he believes, tends to stay ahead of such market disasters as happened last October. Last fall, he notes, utilities represented a big percentage of the low-p-e universe. Thus, come Oct. 19 and the market break, utilities held up very well.
In effect, Otto says, Brandywine's strategy - based on going after issues with extremely low p-e ratios - represents the ``next generation of indexing.''
Market analysts stress, however, that there are no easy answers regarding sound investment decisions. The narrower the investment choice, for example, the greater the potential reward. But the potential risk is greater, too.
Generally speaking, the analysts say, investors should be prepared to stick to their investment strategies during the course of a market cycle.