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Farrell: Attention shoppers!
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October 6, 1998: 10:49 a.m. ET
Analyst sees market bottom ahead, advises 'defensive' buying
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NEW YORK (CNNfn) - Blue chip stocks haven't officially hit a bear market, defined by experts as a drop of 20 percent from their highs. The Nasdaq, however, is down more than 23-1/2 percent from its July 20th record-high close and down 2 percent for the year.
Does this mean it's time to buy or sell?
Vince Farrell, chief investment officer of Spears, Benzak, Salomon & Farrell, told CNNfn that rather than deciding whether we're in a bull or bear market, investors need look at the whole financial picture.
Here's a partial transcript from that interview.
JOHN DEFTERIOS, CNN ANCHOR: Do you think it is too late to develop a defensive portfolio for yourself?
VINCE FARRELL, CHIEF INVESTMENT OFFICER, SPEARS, BENZAK, SALOMON & FARRELL: It's never too late to develop a defensive portfolio, but I think this argument about bull market/bear market is a bit misplaced. The average stock on the New York exchange and Nasdaq is down well more than 40 percent from its high. And a few of the generals have held up, so the indices look relatively better. Of course, not good, but somewhat better.
I think what you really need to do now is put aside the argument whether you're in a bull or a bear market and figure how difficult the economic environment is going to be. I think it will be pretty difficult. And what's the appropriate investment strategy going forward for the next couple of years? Keep in mind that since World War II there have been 50 three-year-periods, and the market has given you a positive return in 48 of them, and only in two three-year-periods have you lost money. So I think you have to calm down a little bit.
You know, the apocalypse is probably not upon us. I think we're probably starting to approach and form a bottom in here, and now is the time to be shopping. I think more on the defensive side anyway, because I think the nature of the world the next couple of years looks a little difficult.
DEBORAH MARCHINI, CNN ANCHOR: A little difficult. Translating that to the U.S. economy, do you see a recession in the cards for profits, if not for growth overall?
FARRELL: Well, OK, two questions there. I see a profits recession, but I don't see a recession. But who knows? I think if a recession started to spill onto our shores, it would be because of the international environment. But remember we have a couple of things going for us. Two-thirds of all economic activity in the United States centers on the consumer. Two-thirds of that is the service sector, and that looks pretty healthy right now.
We have a chairman at the Fed that has evidenced ability to lower interest rates when he thinks necessary, and remember that on the other side we have a budget surplus right now. Mr. Rubin, I think, is a pretty smart guy. And if he saw the need, he would encourage fiscal stimulus, which would be cutting taxes or spending some money on the government's part, which is a lot easier to do when you have a surplus as opposed to a deficit in years past. So I think we have a lot of weapons in our arsenal to combat a recession if it were to come. I suspect it would be short and shallow.
DEFTERIOS: What I find interesting about this, though, is that other nations are not participating, or at least cooperating, with the U.S. The G-7 really has a divisiveness now that I've not remembered back to.
FARRELL: Yes, I agree with that, but I think the G-7 has less leadership now than at anytime in the past. There is no leadership politically in the world. There is no leadership in the United States. There is no leadership in Russia. There is no leadership in Japan. Who is going to take up this matter? Now, Mr. Clinton this past weekend called for dramatic measures, but I think that's more a device to get the attention off the scandal that's going on right now. But it is...
DEFTERIOS: And nobody sees an end to it, either, which I found was interesting. Nobody really addressed what he talked about going into the IMF meeting.
FARRELL: Well, I don't know that he really had it well thought out. I think that this was a Friday afternoon plan to kind of get some headlines, but I don't think that it's really deeply embedded. The type of stuff that you need really has to go on behind closed doors where you're talking leader to leader, staff to staff -- what can we do? Grabbing headlines alone is not going to do it. We need some true leadership and we have to have some countries, especially Japan and I think Brazil, acknowledge the seriousness of their situation, and be willing to do something about it themselves before a whole group of nations can sit down and get anything done.
MARCHINI: Bottom line, though, is for the domestic economy as long as the consumer keeps going. You don't think it matters all that much?
FARRELL: Well, I can't say I don't think it matters. I think that the strength of the consumer market in the United States is a very good prop. But an awful lot of consumer spending -- not a lot of consumer spending -- but a good amount is the wealth effect. You and I have a good stock portfolio, we feel good. If you bring nothing but malaise around the world, then it's going to affect consumer spending. But I think it's a very strong prop that will help prevent recession.
MARCHINI: The malaise yesterday was in the Nasdaq market. What happened to that market that it fell apart?
FARRELL: I think probably the idea that capital spending is going to fall off. Not just for manufacturing worldwide, but also for financial services, which spent an awful lot of money upgrading their computer equipment year in and year out. I don't know what percentage it is, but I think it's around 20 percent of all quote "capital spending in technologies, financial services," and those companies are having their troubles right now.
DEFTERIOS: Some see that as a positive that the big four finally toppled because they were holding up so well.
FARRELL: John, that's absolutely true. Unfortunately, you've got to get the general shot before the market can kind of march ahead. And that's going on right now. That's why I think we might be in the bottoming process. 
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