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Analysts stump for market
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October 28, 1997: 8:43 a.m. ET
Wall Street watchers say sell-off was reaction to excessive valuations
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NEW YORK (CNNfn) - Monday's wild market ride has turned Wall Street's leading analysts into evangelists of sorts. They're out en masse urging investors not to overreact to what is being mostly classified as a correction designed to bring overvalued issues back in line.
Vincent Farrell, chief investment officer at Spears Benzack Salomon & Farrell and Brian Finnerty of Underberg Harris, both were quick to point out that sound fundamentals will keep the market on the ground.
Speaking of the trading curbs that shut the markets down early Monday, both said they were designed with good intentions but may not serve a noble purpose.
"I don't think they're any good. What we did with the halt was aim where we had to get to shut the market down. I think it creates a sense of ill equity in the market, so people think they'd better sell. I think the intention is appropriate, it just doesn't do any good," Farrell said.
"I don't like to see them because I believe it builds up steam on the down side. The Nasdaq's down 14 percent from the top -- that's a big correction. Earnings have been very solid. Small company earnings are outgrowing the S&P 500. There are a lot of positives out there. We're going to get to a level where people will buy stocks," Finnerty said.
Both predict the market will turn sharply lower initially, but said good values remain.
"All the overseas markets are down between 4 and 7 percent, so we know we'll open lower. The curbs yesterday caused selling to pick up. I think a lot of selling pressure will remain on the opening," Finnerty said. "I'm very optimistic in the long run, but I think people will sell into the first rally. You'll get a lot of fits and starts."
"I think the market will open sharply lower. I don't know where it will go in the short term, but we've said the market was over extended because it was trading at about 20 times anticipated earnings for next year. A fair multiple in my mind is 17 times earnings.
"I believe the multiple plus inflation should add up to 20. That means 820 on the S&P 500 is a target and we're at 870 right now. I think you could have another 7 or 8 percent decline to get to fair value. You may get it in one fell swoop, but it might take a while to get there," Farrell said.
The growth of 401(k) retirement plans has fueled investments in mutual funds, making many more Americans market investors. Farrell said mutual fund redemptions may play a role initially, but he believes the system is designed to cope with ups and downs.
"We're off, but we're still up 11 percent on the year. We've been saying that investors are a permanent part of the market because of 401(k) plans. I think there will be a trace of panic, but the mutual fund industry is so sophisticated, they can track margin calls during the day. I expect a touch of panic, but out of chaos comes opportunity," he said.
As to whether there will be any lasting effects on the markets from the sell-off in Asia, Finnerty said the tech sector will suffer since many U.S. tech firms do business in Asia. But as is the case with all areas of the market, Finnerty said opportunities remain.
"Techs won't be what they were. [The Asia sell-off] will hurt people that sell there. You want to stick with U.S. companies with good earnings growth. I'd stay in the leading area of the tech sector because that will lead us back." (113K WAV) or (113K AIFF)
Farrell said investors can take comfort in the fact that this is a market with good fundamentals and the nation's economy shows no threat of a recession or rising interest rates.
"We got a market that's a little bit overextended. This is perfectly normal. We'll be buying a few things today. I think IBM at 90 with a growth rate of better than 13 percent looks good, as does GTE and Unocal.
"I want to look at things that are fundamentally sound. Private investors shouldn't sell. If you have fresh assets, allocate some for bonds because interest rates will go lower. I think overall, this is an opportunity," Farrell said.
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