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Q&A: State Street's Riley
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May 19, 2000: 12:49 p.m. ET
Shunning tech, investment strategist likes the old-growth stalwarts
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NEW YORK (CNNfn) - In fits and starts, technology stocks have fallen steadily since March, erasing trillions of dollars in paper wealth. Before the tech rout, Ned Riley, chief investment officer at State Street Global Advisors, was making the case for "old economy" growth stocks. Now, with many predicting more tech turmoil ahead, his case for pharmaceutical stocks, banks and consumer products makers may be stronger than ever. Riley recently took some time to discuss his thoughts on the market with CNNfn.com.
Below are excerpts from that conversation.
CNNfn.com: The Nasdaq composite index off about 30 percent since its March high but up about 6 percent from its April low. What do you see ahead for technology stocks?
Riley: I think the Nasdaq is clearly going to remain under pressure shorter term. We have already had a purging, which I consider to be quite healthy, and some of the speculative excesses have been expunged. Basically, there was a lack of fear in the price of the Nasdaq. The first phase of a correction is irrational exuberance with any concern about the risk/reward equation thrown out. Between October and March we endured that period of irrational exuberance. We moved into a second phase, which is a period of indifference. The last couple of weeks has changed a little and has disproved the theory that there was no fear. I'm somewhat heartened by this: I think investors who once thought that stocks could only go up have developed some fear.
 CNNfn.com: Where do you see opportunities?
Riley: I've been an "old economy" advocate for a while and old economy growth is where I think investors should focus on. That sector still has excellent products and strong liquidity that can offset concerns about rising interest rates. Drugs, banks and consumer staples: the focus on these groups and the shift away from tech will act as a stabilizer for the market.
CNNfn.com: Among old-economy growth, what stocks to you like?
Riley: PepsiCo (PEP: Research, Estimates), Procter & Gamble (PG: Research, Estimates), Gillette (G: Research, Estimates). In the drug sector we like Merck (MRK: Research, Estimates), Johnson & Johnson (JNJ: Research, Estimates), Pfizer (PFE: Research, Estimates) and Pharmacia (PHA: Research, Estimates). These are companies that investors will gravitate toward because they have good secular growth prospects and, for one reason or another, they have come under pressure. What they do lack is cyclicality.
CNNfn.com: What sectors are you avoiding?
Riley: We are avoiding cyclical areas of the world. If it's the intention of world bankers to impart slower economic growth, then cyclical stocks could suffer. I'm avoiding basic industrial, chemicals and papers and steels. Gold is another area we would not be to enamored with. So too with any of the metals-related business.
 CNNfn.com: Trading volume has been light in May. What do you think that signifies?
Riley: The last six months up until May were an unusual time for the markets that saw inflated volume. What we had was an imbalance on the part of retail investors. Traders and their small fortunes will soon be separated because of the false notion that you can trade your way through the markets.
CNNfn.com: What's your outlook for the Federal Reserve and interest rates?
Riley: I think the Fed has at least one further tightening in June and another one in August. We've got strong positive momentum in consumer spending. Until the American consumer changes his or her outlook on further income growth, the economy is going to remain vibrant and inflation will continue to rise. The Fed still will have accumulated enough ammunition for 25 basis points (a quarter-percentage point) and maybe another 50 basis points (half a percentage point).
CNNfn.com: Your final thoughts on the market?
The only other observation I would offer up is investors who typically approach the business of putting their life savings to work should look from the top down. The best approach for the average investor is to start with the long-term goal, define what risk category you fall into, and look at the long-time horizon. The worst thing an investor can do as apply an ad hoc strategy based on whether the market is rising or falling. The ultimate goal of the investor is to buy stocks when no own wants them, not to buy stocks when everyone wants them.
-- compiled by Staff Writer Jake Ulick
* Disclaimer 
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