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Manley looks to bonds
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February 8, 1999: 2:31 p.m. ET
Smith Barney strategist sees slowdown in '99, still likes techs, drugs and financials
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NEW YORK (CNNfn) - With high valuations sparking a sell-off in the tech sector last week in the states, many on Wall Street have shifted to a more balanced portfolio.
John Manley, market strategist with Salomon Smith Barney, is among them.
Manley has his eye on corporate bonds. On Monday he spoke with CNNfn about what he's looking for in the markets and where investors could find safety and value in 1999.
Here is his "Business Day" interview:
JOHN MANLEY, MARKET STRATEGIST, SALOMON SMITH BARNEY: When you look at stocks that came back very quickly and very nicely from the scare we had last year, the corporate bond market slowly returned to that.
So one of the reasons we kept a somewhat higher bond [portfolio] is… the savings municipals and some of the corporates that trade off governments at very high premiums, in this case, were attractive.
And there's nothing wrong with stocks. I think this will be a decent year for stocks, but perhaps not as great as the last three or four.
JOHN DEFTERIOS, CNNfn ANCHOR: All right. When you say decent, are you looking for a 10- to 12-percent return for the S&P 500?
MANLEY: I'd say about 8 to 10, 8 to 12, somewhere in that area, which is probably as good, if not a little bit better, than a very long-term average. Still dependent somewhat on the bond market, but a market where I think it's going to be broader than it's been before... a broader advance, but perhaps not as violent to the upside as last year.
DEFTERIOS: Pretty healthy debate over the weekend, in terms of the press about this tech sell-off, whether it creates an opportunity or not. The downgrade of Intel (INTC) by Tom Kurlak of Merrill Lynch.
MANLEY: Right.
DEFTERIOS: Your thoughts on the tech sector and the growth we're going to see for the rest of the year.
MANLEY: Well, the numbers I'm getting from my analysts are still very good and the numbers I'm getting from the rest of the Street are still very good.
In the last year, I think earnings expectations are up something like 15, 16 percent for tech - more than the market expectations are up.
The problem with that is that's about as high as it gets or has gotten in the last 20 years. So you've seen an awful lot of good news.
You've moved the stocks up something like 35 to 40 percent, versus the market, so they were due for this sort of pullback when there's a vacuum of news.
I'm getting a sense that the first-quarter numbers will be good for my analysts. If that's true, this resumes for a while.
There's two things to remember about technology. Number one, don't play them on valuations. Valuations almost never work. In fact, they're generally deceptive.
And number two, when you look at it, remember it's a cyclical group. Even if it's not at the top, at some point in time, this business has great growth, but it's cyclical growth. For the time being, that's good and we'll stay with it for the time being. But that's just what I said, it's for the time being.
DEFTERIOS: You've had a mantra for a long, long time, John. That is stay with technology, drugs and financials. You like the other two sectors we haven't talked about?
MANLEY: I still do. Again, I'm always - I have a miserable personality. I'm always looking for things to get out of when I like something and things to get into when I don't like something.
I still haven't found the reason yet to sell the other two. In fact, I think the weakness we're seeing in financials is a very good buying opportunity, even if the economy is getting stronger which, strangely enough, people are worried that it's too strong right now.
Financials, especially banks, which is where we focus, banks do reasonably well in decent economies, provided the Fed's not tightening. And I don't really see the Fed tightening over the next six months.
DEFTERIOS: We'll get a pretty good read this week with the productivity numbers tomorrow in retail sales on Thursday after that strong jobs report on Friday. Is inflation in the bottle because of the deflationary pressures from Latin America?
MANLEY: I think it still is and I think it's - I think you do get a little bit from productivity and it's a simple fact that it should have been here four years ago.
Four or five years ago, people were talking about the end of the cycle because inflation was going to cause it to boil over. It hasn't happened yet.
Now, you are seeing pressures in terms of wages, but there's - those don't go on forever. And I think they do tend to moderate somewhat and I think they're going to function of lower commodity prices.
So I don't see inflation yet being problem enough to cause the Fed to do anything negative.
DEFTERIOS: I'd like to go back to where we started: 55 percent in stocks, 40 percent in bonds, 5 percent in cash. Are you going to change that, at all?
MANLEY: I don't think so. I mean, I think, you know, clearly, the stock market, longer term, is a very attractive investment, but I still think you have to get through a year that's going to be dependent on the bond market.
I still think the earnings this year will be flat, which will be fine, but I think they're going to be flat and I think, actually, given what happened in January, for the first time you probably have the chance for some disappointments over the year, in terms of earnings again... I think people on the buy side started to believe in a better earnings picture for 1999. I don't think it's going to be that great. I still think it's going to be challenging.
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