As market reels, what to do?
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January 4, 2000: 5:46 p.m. ET
Salomon’s Manley advises cash; others say watch P-E ratios or trim tech weight
By Staff Writer Jamey Keaten
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NEW YORK (CNNfn) - Investors may need to buckle their seat belts for a bumpy ride ahead due to a bearish bond market, less market liquidity and frothy technology stock prices, Wall Street seers said amid a stock market drubbing Tuesday.
Stock markets worldwide sank as bond yields climbed Monday amid concerns that U.S. Federal Reserve policy makers will boost interest rates in February and cause corporate borrowing costs to rise.
The Nasdaq composite, which hit a new record high Monday, sank 230 points for its largest one-day point drop on record, while the Dow industrials tumbled more than 350 points.
So what is an investor to do in such suddenly turbulent times? Market sages outlined several alternatives, such as seeking more safety in cash, trimming exposure to the technology sector, and a marketwise, stock-by-stock hunt of those relatively few underpriced issues that are still out there.
Many crystal-ball watchers on Wall Street have been wondering aloud about when stocks, and particularly high-priced Internet and technology issues, would run into market valuation realities.
Retreat into cash...?
The mood about stocks generally is still bullish through Wall Street’s hallowed halls. But one top market watcher is recommending his clients put a bit more of their portfolio into the safety of cash.
John Manley, Salomon Smith Barney’s leading stock strategist, cut his recommended allocation for stocks in his model portfolio to 55 percent from 60 percent and raised his recommended cash holding to 10 percent from 5 percent.
Manley cited the Federal Reserve’s decision last year to make more cash available to the financial system to prevent any Y2K-related market turmoil. That policy, he argues, led to an upswing for stocks -- particularly technology issues - at year-end.
Now that the new year dawned with few if any market hitches, the reverse is the case; the Fed won’t be supporting market liquidity as much. Said Manley, "While the amount of constraint is an open question, we fear that a meaningful decline in the equity market may eventually occur as a result.”
...or keep your powder dry?
Others stopped short of calling for a retreat into cash, but said that investors will need to be choosier about the stocks that they purchase. Hugh
Johnson, chief market strategist with First Albany, said even the bluest of blue chips in the Dow are valued higher than they should be.
Pleased that valuations may be coming back to earth a bit, Johnson said some Dow issues have price-to-earnings ratios that are twice their growth rates, and that’s a sign of an overly frothy market.
"You want a P-E ratio that’s close to the growth rate, and right now we are nowhere near that,” he said. Still, Johnson insisted stocks are the place to be: "keep your powder dry. We are going to get a buying opportunity - just not yet.”
When it comes to P-Es, no sector has defied gravity like the technology sector. Most analysts, despite the carnage Tuesday, are still swearing by tech stocks as the place to be in the Digital Age because of their hot growth prospects.
David Powers, senior technology analyst at Edward Jones, said the blockbuster gains in the technology sector last year probably inflated their weight in investor portfolios. Now it may be time to fix that imbalance (510K WAV or 510K AIFF).
Still bullish as economy rolls
Some experts, insisting that U.S. economic fundamentals are too strong to slow the market steamroller, say that while the volatility is likely to continue, stock gains are on tap again this year.
"We’re still bullish,” said Alan Skrainka, chief market strategist with Edward Jones. "We think that the market can be up 8 percent to 10 percent this year, but it’s going to be a rocky ride, as I think you can see from the trading in the market today.”
Others, however, see a buying opportunity. They shrugged off Tuesday’s plunge as it related to jitters about earnings in the high-flying technology sector or they insisted that as long as bond yields remain under 7 percent, stocks should continue to flourish.
Al Goldman, stock market strategist with A.G. Edwards, said those bond yields are the real wild card for the stock market in coming weeks. But he is still bullish on stocks, reading the end of the Y2K concerns as a sign that more money may be headed into stocks in the coming weeks.
Y2K concerns caused some investors to hoard cash in the event of year-end market upheavals. Plus, money from 401K and retirement plans are set to hit the market this month -- and that money could find its way into stocks, said Goldman, who recommends investors buy more.
"There’s a lot of money that got put under the mattress in November and December,” Goldman said. "A little bit came in yesterday early and when the bond market collapsed, out that money went.”
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