Bears Are Coming Out Of The Woods

The stock market has begun to resemble that other great American disappointment--Ross Perot. Equities were on a tear just weeks ago, with the Dow Jones industrial average climbing above 3400 to an all-time high in early June. But stocks have seesawed sickeningly since then, as cheerless economic tidings have gnawed away at investor confidence. Opinion is growing on Wall Street that stocks are expected to repeat the kind of listless performance that they endured in 1990--and can be expected to decline, or tread water at best, for the rest of this year.

Only the most bearish stock-watchers expect a market calamity. But even analysts who believe the market is fundamentally sound, such as widely followed market maven Suresh Bhirud, are turning cautious. So are market strategists employed by major brokerage houses, despite an institutional tendency to accentuate the positive. Among the Wall Street luminaries who are predicting a spiritless second half are E. Michael Metz of Oppenheimer & Co., Morgan Stanley's Byron R. Wien, and Greg A. Smith of Prudential Securities Inc. "Everybody's struggling to make money," laments Smith, "but you can only bang your head against the wall for so long before you decide the wall is harder than your head."

Here are some of the key arguments being advanced by the bears:

-- The election. Until recently the market had assumed--"discounted," in market lingo--the reelection of President Bush, despite the uncertainty posed by Perot. But in the wake of his withdrawal, the zeitgeist on Wall Street has shifted in favor of a Democratic victory, and that will continue to dog the market unless the polls shift in favor of Bush. Bhirud, who heads the Bhirud Associates research boutique, is advising his clients to shift some of their funds into cash as part of a "defensive posture until the Presidential elections."

-- The economy. It's starting to scare people. Sure, economic weakness has been keeping interest rates low, thereby sustaining bond prices and making lofty price-earnings ratios seem more palatable. But low rates are no longer generating all that much enthusiasm, and analysts have lately been raising the possibility that continued malaise may cut the legs out from under corporate earnings. "Earnings expectations are just too high," says Metz. "It's unreasonable to postulate accelerating earnings momentum in the second half of 1992 and a 25% increase in earnings in 1993." Metz thinks 1993 will be a time of fiscal restraint, no matter who is elected. That would be a downer for stocks.

-- The dollar. The increase in the German discount rate is giving investors the willies, and it sent the U.S. market tumbling on July 20. Skeptics maintain that weakness in the dollar will continue to put upward pressure on bond yields and thus hurt the market.

-- Small-investor bullishness. That has long been a danger signal, and bears maintain that red lights are flashing. They note that the market for initial public offerings was robust until recently and that industry statistics show investor cash flowing into equity mutual funds. "Most people are still positive. People are fully invested," notes Wien.

So where should investors place their money if they insist on buying stocks? Interest-rate-sensitive stocks--banks and utilities, for example--are favored by otherwise stock-averse market watchers because of continued depressed rates. Also getting the nod are companies that are expected to buck the economy and show strong earnings growth. Smith puts in that category such old standbys as Gillette Co. and Coca-Cola Co., and Metz believes that insurance companies such as American International Group and Washington National and drugmakers Bristol-Myers Squibb and SmithKline Beecham should do well in the months ahead. But there isn't much else that tickles his fancy. Says Metz: "I think the bull market ended in February for most stocks."

One silver lining in the otherwise cloudy picture is the fact that, well, the picture is so cloudy. Negative sentiment is considered good among folks of a contrarian bent--on the theory that the conventional wisdom is often wrong. "There's a lot of negative sentiment--a lot of professional bearishness around," concedes Wien. "But there are times when the professionals are right." And this may be one of them.

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