Mutual fund investors are standing steady at the helm.
Investor dollars continued to pour into mutual funds during the third quarter of 1996, despite the midsummer gyrations in the stock market that sent the Dow Jones industrial average skidding southward in July. But forget July! After sagging near the 5,000 mark in the heat of summer, the Dow bounced back and began setting new highs in October.
For the third quarter, domestic stock funds posted average gains of 2.63 percent, beating corporate bond funds (1.77 percent), municipal bond funds (2.13 percent), and overseas stock funds (minus 0.65 percent).
Looking ahead, many analysts see the current bull market holding its own right into 1997. "There could be some pauses and pullbacks along the way, with some [downward] market consolidations," says Larry Wachtel, a vice president with investment-house Prudential Securities Inc, in New York. "But essentially, the market trend is upward." It is driven, he adds, by such factors as continued corporate earnings gains, corporate buybacks of stock, heavy mergers and acquisition activity, and steady inflows into individual 401(k) retirement plans.
The market will eventually surpass and stay above the 6,000 point level on the Dow Jones industrial average, Mr. Wachtel says. Technology and industrial sectors continue to look promising.
The presidential election has largely been discounted by Wall Street, with most financial houses assuming a continuation of the status quo, Wachtel says - that is, reelection of a Democratic White House (with President Clinton), and a Republican-controlled Congress. What would be upsetting to financial markets, he says, would be if there were to be "either election of a Democratic Congress along with President Clinton, or a victory by Senator Dole plus a Republican Congress."
Wall Street, Wachtel says, likes the idea of a divided government, as a check and balance on unwise legislative programs that could drive up the federal budget deficit.
"The election-outcome has been built into this [stock] market," says Stephen Smith, executive vice president of Brandywine Asset Management Inc., a financial services firm in Wilmington, Del. He too anticipates a divided Clinton-GOP government. But a slowdown in consumer spending this fall, plus a continued rise in personal bankruptcies, will rein in corporate profits, he reckons. Thus, for equities, Mr. Smith sees modest returns. However, he likes financial stocks, selected-technology firms, telephone companies, and utilities.
There will be opportunities for gains in the bond market, he says. Brandywine likes intermediate (10 years or so) to long-term bonds. He expects that the yield on long bonds could eventually come down to 6.25 percent, from the current range of 6.75 percent. The yield on the intermediate range bond could drop to between 5.9 and 6 percent, he says, from the current range of 6.50 percent.
Still, some analysts believe that, based on historical trading patterns, the stock market may experience difficulties after the presidential election and going into next year. James Stack, who publishes InvesTech, a financial newsletter, says a defensive, high-cash position may be prudent regarding equities, given the market's current high valuation of stocks. He holds that such sectors as technology, securities-brokerage firms, and carmakers may be specially vulnerable to share-price downturns.
While most of the inflows during the quarter went into equity funds, money-market fund coffers also continued to swell. "A tremendous amount of money is sitting on the sidelines," not yet committed to stock or bond funds, says Chip Norton, managing editor of IBC Financial Data's "Money Fund Report" in Ashland, Mass.
Yet net gains to stock funds are running in excess of $161 billion so far this year, according to the Investment Company Institute (ICI), a Washington-based trade group.
Net inflows to stock funds slumped to $5.8 billion in July, after a pattern of double-digit inflows earlier in the year. But they rebounded to just under $18 billion in August. September figures, which are not yet fully tabulated by the ICI, are expected to be in the $15 billion to $20 billion range.
Bond funds remain laggards. Net inflows to date are running around $7.5 billion, through August. But money funds soared by $82 billion during the third quarter alone, according to IBC Financial Data.
Analysts suspect mutual-fund investors will not flee the market in a downturn. The 1990s, they say, may be repeat the 1960s when investors continued to buy into mutual funds despite successive bear markets.
"People who say that mutual-fund investors will 'cut and run' when there is a market downturn are wrong," says Jay Schabacker, editor of Mutual Fund Investing, a monthly newsletter published in Potomac, Md. "Corporate earnings have been good." But what is driving mutual fund investors is not short-term gains, but "long-term savings for retirement," he adds.
"We're continuing to see a great wave of money going into retirement savings programs," says John Markese, president of the American Association of Individual Investors, an individual-savers association in Chicago. "Much of that money is represented by 401(k) savings plans. The money continues to flow in, no matter what happens in the economy, because the savings plans remain in effect on the part of individual investors."
Most workers do not substantially shift or alter their retirement savings plan during the course of a year, Dr. Markese says.
Still, studies of his own members show that many investors are increasing their cash position, which helps explain the huge flows to money funds. According to a recent AAII survey, cash holdings rose 2 percent in July alone, to 21 percent of investor portfolios. But that does not not appear to be money withdrawn from other sources, such as mutual funds, Markese says. Rather, it tends to be new earnings, not yet committed to any type of investment vehicle.
"The 'buy and hold strategy,' " that is, buying and holding mutual funds for the long haul "works best," in terms of total financial gain, says Walter Updegrave, associate editor of Money Magazine. Mr. Updegrave, who has just written a new book, "The Right Way To Invest in Mutual Funds," (Warner, $9.99), argues that a mutual fund managers' chance of beating the market at any point in time is less than 50 percent.
And what is true for a manager is no less true for the individual investor, Updegrave suggests. Thus, a mutual-fund investor, he reckons, should buy funds based on their individual priorities, and, barring any major change in the market, stay with the fund as long as possible.