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Manley urges caution
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October 26, 1998: 12:07 p.m. ET
Smith Barney stock market strategist sees bargains, warns against complacency
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NEW YORK, (CNNfn) - CNNfn spoke with Salomon Smith Barney stock market strategist John Manley about the current state of the market and its prospects going into the fourth quarter and beyond.
Manley viewed the current market run-up as a short-term rally, but insisted that stock bargains, particularly among large-cap issues, can still be found. He remained cautious and warned investors not to be lulled by the market's relative calm.
Here is his "Business Day" interview:
JOHN METAXAS, CNNfn ANCHOR: There's an old expression on Wall Street: don't fight the Fed. The Fed is easing interest rates; does that mean it's inevitable the market moves higher?
JOHN MANLEY, STOCK MARKET STRATEGIST, SALOMON SMITH BARNEY: Don't fight the Fed. I think it's inevitable it's not going to move lower over the short term. Usually, the Fed gets its way. I mean, since the Second World War, every time the Fed has wanted to have a recession, we had one; when they wanted it to end, it ended.
They don't want us to have a financial panic, and I think they have to make us feel good so people lend money. That helps the market over the short term.
METAXAS: But. There's a but in there.
MANLEY: Well, but look at Japan. The Fed doesn't control the money supply in Japan or in Hong Kong or in Europe or Brazil, and I think we have to see how much the U.S. can act alone. We are seeing signs they're getting a bit better. Stocks are still fairly expensive on a long-term basis. So, for the time being, until we know if it works, we give the Fed the benefit of the doubt. Somewhere in, I'd say, the first quarter, we have to find out whether all these solutions to all the problems actually make a difference.
DEBORAH MARCHINI, CNNfn ANCHOR: Do you have any good indicators of investor sentiment right now?
MANLEY: Well, I think -- one of the best I look at is stocks versus bonds; that sounds sort of strange. You contract these Ivus estimates and the First Call estimates, but I like to watch stocks versus bonds. When bonds outperform stocks, that's telling you the growth expectations, earnings expectations, are going down.
As of about two or three weeks ago, stocks were down almost 30 percent versus bonds and that compares to times like September of '74, July of '82, and November of '87. We had a lot of bad news in the market.
METAXAS: So, you're looking for a trading range in the market. What might that range be, and how should you react, if at all, when it gets to higher or lower end of it?
MANLEY: Well, I think in terms of the S & P, maybe 1,100 on the upside, 1,040 on the downside, which I guess is 8,800 to the low eights on the Dow Jones. I think it depends where you're positioned. I mean, if you're 100 percent stocks -- I still don't think this is the environment for 100 percent stocks -- you should still own some bonds, you still should own some cash.
You can add some names you've been looking to get into. There are some bargains around, individually. So, you really have to attack it on your own basis.
MARCHINI: In a market like this where global factors and Fed policy are exerting such a big impact, what is the role of earnings and how are they doing so far?
MANLEY: Well, it's ultimately a test. Today's earnings mean absolutely nothing, because they're about yesterday's results. Where you have to look is somewhere down the road. Now, we've seen some examples back in the late '50s where there was no earnings growth for a while, and the markets did OK, but not much better than OK for a couple of years.
I think we have to see some signs that we're going to see better than, let's say, zero percent growth next year. Now we're looking for zero to slightly down numbers next year. That's a trading range.
MARCHINI: You're looking for -- you're talking zero to slightly negative growth, that's for profits, not for the overall economy.
MANLEY: That's for profits. Right. For the S & P 500, we have a slightly down, and the economy slightly up. So, we're slipping versus the economy.
I think if you have only flat earnings next year, down, let's say, zero to 5 percent, that's OK, and we stay in this trading range. If it's worse than that, and that's what we'll find out sometime in the first quarter, that's where the risk comes in.
METAXAS: In this environment, what kind of stocks are you picking? We do have a list of some of your picks. Tell us your thinking.
MANLEY: ...I want to have sort of an eclectic list because there's some values around, there's some good momentum stocks around too, and I think if there ever was a time when you want to diversify, I mean, I think the banks are very good values, but they have this imponderable question.
Well, the Fed's on their side; I'll buy National City (NCC), which is a good Cleveland-based bank with a great growth record. I think you can look at some of the drug stocks as well; I think they're fairly cheap. I like Bristol-Myers (BMY) in that respect; I think, again, a very high quality, cheap stock.
Technology should do extremely well in this environment. Hewlett-Packard (HWP) is exposed to Asia, but in the last three months it hasn't gone down versus the market, despite being pummeled with bad news. And finally, I think Schlumberger (SLB) is one of the cheapest big-cap stocks around... extremely cheap.
MARCHINI: Technology's been hit by worries about capital spending cutbacks. You don't share them?
MANLEY: I do share them, it's a question of how much is bad news. I mean, we should have a pretty good Christmas. I take these things one step at a time, Deborah. Let's get through the fourth quarter. We should have -- we have very low inventories.
We should have a very good Christmas. You should actually see financial companies actually upgrade some other technology in this quarter because of the greater volatility. It's next year we worry about, and we'll worry about next year when we get to it. 
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