Last week’s peace feeler, however, should get you to thinking about the trumpets. Bulls and bears alike see a short, thrilling rally on victory’s triumphant blare. But it’s not for nothing that adages gain their reputations. Michael Murphy, editor of the Overpriced Stock Service in San Francisco, thinks this recession will last well past summer which, he surmises, will send the market sprawling. His target for the Dow Jones industrial average: 2,100, compared with 2,935 last week.
But nothing profits investors less than awaiting the “right” moment to buy. As the explosive war rally showed, that moment never waits for you. Bull markets burst unexpectedly from the gloom of recession. If you’re out of stocks, you lose the cycle’s strongest gains. Adages aside, the bull case is compelling. Steven Leuthold of the Leuthold Group in Minneapolis has charted historic stock-market valuations, based on dividends, price/earnings ratios and other fundamentals. His conclusion: big-company stocks won’t be overvalued until the Dow reaches 3,300 to 3,500. That’s up another 12 to 20 percent.
Market timer Martin Zweig, editor of the Zweig Forecast, looks at technical indicators like the percentage of stocks that advance compared with those that decline. On Feb. 5 his signals flashed a superbull move. After similar flashes in the past, the S&P has risen an average of 19 percent in just six months, he says.
To dissect the amazing market rise is to sound like Rube Goldberg reinventing cause and effect. But, for the record, here’s how the ball bounced: (1) the Scuds missed the Saudi oilfields, (2) squelching fears that production would be crimped, which (3) kicked down the oil price and inflation, (4) greasing the slide in interest rates and (5) raising visions of economic recovery, which (6) tumbled cash-rich investors out of their money funds and into stocks, (7) driving prices up. Simple as that. By this analysis, any drop in stocks is only a breather, not a harbinger of collapse.
Are you reluctant to buy because prices seem too high? Don’t worry about it. Even if you buy at a top, that won’t matter in the long run - as long as you invest regularly and don’t scamper out when prices fall.
Say, for example, that you’re the world’s worst market timer. Once a year, you put $2,000 into stocks on the day that prices hit their peak. Over the past 20 years, says Steve Norwitz of the mutual-fund group, T. Rowe Price, your average annual return would still have been 10.4 percent as measured by the S&P 500 - compared with 8.7 percent from 20-year Treasuries. Moral: even lousy investors can come out ahead if they stick with the stock market long term.
Aggressive buyers stay mostly in stocks all of the time. Alternatively, take the mugwump approach - put your mug in the market and your wump on a pile of Treasury securities. That way, half your money is always safe. So you should feel freer to keep all the rest in diversified stock-owning mutual funds. Buy shares every month, in good markets and bad. When prices are down, you get better value for your money.
The most tantalizing buys today are the funds that invest in smaller companies. Historically, small stocks outperform the market by a compounded 2 percent a year. But for seven years they’ve dropped behind, so their current values are compelling. Since October the index of over-the-counter stocks has risen by 38 percent and that’s only the start, predicts James Awad, head of BMI Capital in New York. A small-stock rally lasts for years.
Preston Athey, small-stock portfolio manager at T. Rowe Price, makes two other arguments for buying the small-stock mutual funds. “We’re seeing a tremendous amount of interest from the pension funds,” he says, and their money can drive prices up. Also, since the third quarter of 1989, relative earnings have been stronger for small companies than for bigger ones.
Among small-stock funds, the volatile growth funds like New Horizons have led the pack. The “value” funds, which accumulate stocks that are underpriced, haven’t yet made an equivalent move. Don Phillips, whose Morningstar, Inc., tracks mutual-fund performance, expects a catch-up and is recommending quality laggards (table). Forget the trumpets, Zweig advises. In the market, the bulls have the floor and the war is already history.
For most of the 1980s, small-company mutual funds laid low, but now they’re burning up the charts. Some have already made big gains this year; others are expected to catch up, making them especially good buys.
Some Leaders Four-month gain MFS Lifetime Emerging Growth 58.3% T. Rowe Price New Horizons 43.3% Nicholas Limited Edition 33.3% Others to Watch Four-month gain Janus Venture 22.7% Pennsylvania Mutual 20.8% Dreyfus New Leaders 19.6% SOURCE: LIPPER ANALYTICAL SERVICES
