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In trading range, for now
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October 22, 1998: 12:07 p.m. ET
Smith Barney strategist Marshall Acuff sees continued volatility, lower returns
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NEW YORK (CNNfn) - After big gains in the Dow during the last week and a half of trading, analysts are looking to see if the industrials can hold on to their gains in an increasingly volatile market. Profit margins are shrinking and it remains to be seen whether or not they can keep up with rising costs.
CNNfn's Deborah Marchini spoke with Marshall Acuff, equity strategist at Smith Barney, about the current state of the market. It was Acuff's belief that the markets have tested their lows for the near-term, but he's not expecting a substantial bull run, either.
Here is a transcript of his "Before Hours" interview:
DEBORAH MARCHINI, CNNfn ANCHOR: What is your prognosis? It looks, within the last few trading sessions, as if the six-day string of rallies on Wall Street is losing steam?
MARSHALL ACUFF, EQUITY STRATEGIST, SMITH BARNEY: Well, we've a 1,000-point rise from that 7500 level on the Dow which held so well. So, some consolidation over the short-term certainly would not be surprising. I think we're going to continue to be in a trading range type of environment probably through year end, and I think many of the fund managers are going to close out the year by simply trading their way out of the year.
MARCHINI: OK, "trading their way out of the year" means looking for very small profits on short-term positions; not making long-term investments?
ACUFF: Exactly. They're going to be very opportunistic. They're going to be looking for stocks that fall off, or areas of fall off. Rush in and buy them; trade them up, and move onto the next opportunity.
MARCHINI: Sounds to me like a recipe for continued volatility in the stock market.
ACUFF: Oh, I think we're going to see more volatility. I'm not sure we're going to see anything like we've seen the last couple of months, but I don't think the market's going to run away on the upside. I think there are too many head winds down the pipe, particularly the outlook for profits. We're looking for profits to be down slightly next year.
MARCHINI: All right, that being the case, would you predict an overall economic recession or merely a profits recession?
ACUFF: I think we're looking at a profits recession, not a business recession. We see growth about 1 to 2 percent next year. We see profits down about 1 percent.
MARCHINI: All right. So, basically, the top line will continue to grow. Demand for services is there. It's just the fact that -- what?
ACUFF: Well, the bottom line here is that profit margins peaked back in the third quarter of last year, and have been coming down ever since. Costs continued to rise. Most companies can't get pricing flexibility. Productivity growth is slowing down, so it's going to get harder and harder for more and more companies to sustain the levels of profitability that they've enjoyed. Meanwhile, they're starting to cut back. Layoff rate is up 253 percent from a year ago -- year to date -- and still rising.
MARCHINI: It's true, but we don't see it in the jobless figures, like the initial jobless claims out today.
ACUFF: Well, depends on how you look at those numbers. The bottom line, as we go forward, is consumer confidence has peaked. It's probably going to continue to move on the downside. Consumption, next year, will be slower, and most importantly, capital spending next year will probably be in single digits.
MARCHINI: Single digit growth.
ACUFF: Yes.
MARCHINI: OK. Is the Federal Reserve helping out here? I mean, are the Fed's rate cuts the one thing that will keep us out of an overall economic recession, and do you look for more of them?
ACUFF: Well, the game plan, I think, on the part of the Federal Reserve is to continue to lower rates over the months ahead; maybe the quarters ahead -- to try to cushion the slowdown of the economy. They see the potential risk in the economy. They see potential risk in the financial system, so they're going to do everything they can to ameliorate those risks.
MARCHINI: All right. Where did you see the best bets, in terms of investment advice? What kinds of companies and what companies specifically are you looking at for an average individual investor who can't go in there and day trade with the big guys?
ACUFF: I would continue to focus on some of the more traditional defensive types of stocks. These are stocks that, over the course of summer, technically speaking -- showed very strong relative strength, in the face of a very volatile market.
Select electric utilities would be an excellent example of that; companies like Duke Energy (DUK ) and PICO (PICO), Texas Utilities (TXU ), Houston Industries (HOU). Actually, we're seeing earnings growth expectations for the electric utilities come up at a time when -- as we go forward -- earnings growth expectations for most companies are going to be coming down.
MARCHINI: And the dividend yields aren't bad, which is a nice thing to think about it if you can't expect price appreciation.
ACUFF: Well, exactly. Total return is going to be in. Capital appreciation is going to be a question. 
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Salomon Smith Barney
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