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Investors, think long-term
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September 18, 1998: 9:58 a.m. ET
Stock strategist sees short-term rally but profit problems next year
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NEW YORK (CNNfn) - The U.S. stock market may well rally in the next month or so, but U.S. investors have to face facts: Corporate profits are probably going to be flat to down in the United States in the next year.
So says stock strategist John Manley of Salomon Smith Barney.
Speaking with CNNfn's "Business Day" Friday, Manley advised long-term investors to keep buying, but noted that the medium-term is going to be dicey, as much depends on how and when interest rates are handled both here and abroad.
Here is an edited transcript of that discussion.
DEBORAH MARCHINI, CNNfn: Time was when a lot of analysts thought profits would be recovering by the fourth quarter. You don't think so?
JOHN MANLEY, SALOMON SMITH BARNEY: It doesn't look that way. It looked like they were stabilizing somewhat in the second quarter. But they started to give way. I mean, we've seen more revisions downward, we've seen more signs that people just aren't hitting their numbers. And you have to go back and look at this in a long-term concept. The S&P earnings are running around 45, $46 a share. Normal earnings are around 38, 39. So we're pretty high and we're starting to see more downward revisions. That's not a good combination.
MARCHINI: All right. The last time we talked to you, you were projecting … 9,500 on the Dow by year-end. Would you still stick with that projection?
MANLEY: I think it's possible because we've got some good short-term things. A lot of stocks are down. You were talking about that a few moments ago. And the average stock on the Nasdaq is off almost 50 percent, on the New York Stock Exchange almost 40 percent. And you could see a strong rebound because I think you will see lower rates from the Fed at some point in time; you will see more IMF funding; you will see a lot of things that help this along. So you can get a rebound. But I think you have to -- and again in a longer-term context, we've sort of taken some of the magic away. And that magic went away when we saw the financial crisis in Asia. All it was was Asia two months ago. Suddenly (it's now) in Russia, and now, more importantly, Canada and Latin America as well.
JOHN DEFTERIOS, CNNfn: But some very good names out there have been beaten down very hard, like Gillette, for example …
MANLEY: Right.
DEFTERIOS: … Clorox. It's hard to know whether this is a good time to take a long-term perspective and buy these stocks. What do you advise?
MANLEY: If you're buying for a 401(k), if you're buying for your son, my son, your daughter's college education -- I think it's a great time to start. You keep buying things. And the whole point of this is to keep buying through the dips and through mountains and valleys. But the point is, on a very short-term basis, I think we have a rally because it's oversold, bad news. I think they can bring it back over the next month or two. If you go out beyond that, that's when you start to have in the intermediate term some problems. We do have to come to grips with the fact that corporate profits are probably going to be flat to down in the U.S. next year. And beyond that it's going to be problematic. We do have the best friend the stock market ever had in the bond market. That definitely helps and I think that tends to mitigate that.
DEFTERIOS: That raises an interesting point. If you lower interest rates in the U.S., say even Germany cooperates and the U.K., if you lower that money, it's been flowing into the bond market.
MANLEY: Right.
DEFTERIOS: It's been a flight to capital. So it doesn't really help these countries that really need this injection of cash.
MANLEY: Well, see, this is the first time -- (and) I've gone back and looked at this -- this is the first time we've had a 15 to 20 percent pullback in the market without rates being higher. I went back to the '20s and it's never really happened before. And I think part of that is this sort of broken thermostat problem. The U.S. bond market was a great thermostat on the economy for the last five years: stronger economy, take care of it, weaker economy. Now we're seeing rates fall in the U.S. Treasury market, where we really don't need lower rates, and they're rising overseas and they're rising in Mexico, they're rising in Brazil, they're rising in Canada, where we really should be seeing lower rates. That problem has to be dealt with. Now thank God, we have Alan Greenspan, we have Secretary Rubin, we have people who can deal with these things. But they have to be dealt with sometime in the next three to six months.
MARCHINI: The right medicine would seem to be a coordinated interest rate cut. Yet we've seen that ruled out for the time being.
MANLEY: Well, you want to be careful there. The U.S. economy is still a little too strong. So … we don't want to do it before one of two things happens. I think if we see a few more days like yesterday in the market, I think the chance of an interest rate cut, at least in the U.S., goes up fairly dramatically. But absent that, which I hope doesn't happen, we have to see signs that the U.S. economy, and particularly the U.S. consumer, (is) slowing a little bit. I think you will see those in the next three months. Hence, I think you can see -- you've seen more problems in the last two months emerge than I thought would emerge in the next two years. I think in the next month or two, you'll see solutions or potential solutions to those problems emerging. And that sort of gives you back some of what you've taken away, given how far the average stock has declined. The next question is, Will those solutions work? And that's the real tough one because we're still high, we still have high earnings, high prices, high multiples on high earnings, and it becomes imperative that everything work just right. And as you sort of pointed out, Deborah, we're trying to coordinate a lot of different things in here. 
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