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Rationality on Wall St.
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November 22, 2000: 9:04 a.m. ET
Spears, Benzak's Farrell: Consumer spending key to any market rebound
By Staff Writer Catherine Tymkiw
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NEW YORK (CNNfn) - Now that investors have been driven to sidelines by triple-digit point swings in the major indexes and uncertainty about who may occupy the White House, one market analyst says the churning may yield a more rational market.
While the prospect for a stellar fourth-quarter rally seems to have waned a bit as the election anxiety continues to send jitters through the market, Vince Farrell, chief investment officer with Spears, Benzak, Salomon & Farrell, says don't despair.
"I don't think that's (the election) what's weighed on the market -- I think it's the deteriorating fundamentals. My feel is that you'll have a trading range until the end of the year with a downward bias, but I do not think it falls out of bed," he said.
Farrell, who manages $5 billion in assets, is actually enjoying 2000.
 "We're having the best year we've ever had relative to the market," he told CNNfn.com. "We're up almost 20 percent and the market is off only 7 percent."
Farrell says the market is reacting more to weakening fundamentals rather than focusing on who will be the next president. And this is not such a bad thing because it gives a more rational tone to the overall market.
While the markets may have a knee-jerk reaction to any positive or negative news on a daily basis, resulting in these wild swings, fundamentals will ultimately be the market drivers, he explained.
Where are the markets headed next?
Predictions abound about the direction and strength of the major U.S. indexes as the year winds down. Farrell expects a modest uptick after the election uncertainty is sorted out, but cautions that investors should not break out the champagne.
"I think there's a one-third chance you'll get a rally post-Thanksgiving and post-election clarity, but it won't hold because you're going to enter into the (fourth-quarter) earnings warning season," he said. "There's no real reason to have a bounce up. Each time there's been a 5 percent "up" move there have been the pundits saying there's the reversal (of the downturn), only to have it come back down."
Click here to tell us where you think the Nasdaq is headed
With the holiday season gearing up, Farrell suggests watching the pace of consumer spending to determine where the economy is headed.
"What's really turning things is the obvious slowdown in consumer spending and the obvious cutback in capital expenditures on coporate America's part," he said. "The corporate guy recognizes slackening demand, so (he or she) cuts back on capital expenditures which feeds into a slowdown on technology spending."
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Don't quit your day job and don't expose yourself to levels of risk you can't handle.
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Vince Farrell
chief investment officer |
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While the economy appears to be headed for a soft landing, if the Nasdaq tumbles below 2,400 within two days, Farrell says consumers would be scared enough to tighten their purse strings for holiday spending.
Picking sectors, picking stocks
The technology sector has been looked upon as the darling growth area, propelling the Nasdaq to unprecedented highs. But Farrell says those days are over.
That doesn't mean avoiding technology on the whole, but investors need to do their homework to find the right techs for them and to also look at other value sectors, such as financials and energy.
"I like financial stocks, but not banks," said Farrell. "As a rule you have to be very cautious, because if the economy is softening, you don't know the extent of the loan loss reserves they're going to have to ante up for loans that go bad in a soft economy."
He also likes natural gas stocks, such as Burlington Resources (BR: Research, Estimates) and Unocal (UCL: Research, Estimates). Select techs, such as Intel (INTC: Research, Estimates) and IBM (IBM: Research, Estimates) are also on Farrell's radar screen.
Picking and choosing tech issues are never without risk, but Farrell suggests a general rule to finding reasonably priced techs.
He says find technology companies whose price-to-earnings, or p/e, multiples are below the market multiples and whose growth rates are still predicted to be above the market growth rate.
This doesn't make the stock a bargain to Farrell, but it does give a measure of value for investors who still find techs worthy of their money without losing their shirts in the process.
"You're not going to get rich by Tuesday, it's going to take a long time," Farrell said. "Don't quit your day job and don't expose yourself to levels of risk you can't tolerate."
Diversify, diversify, diversify
According to Farrell, the mantra of the markets is to diversify portfolios and always keep some cash on hand. Don't ignore techs, but also look at select financials, natural gas stocks and buy the high flyers with caution.
Most importantly, said Farrell, get to know the companies and how they operate. "So many people own techs and don't know what to do but I don't feel responsible for that -- I have no magic wand," he said.
"You can't guess. The decade of the '80s (for example) was a decade of great wealth creation and it averaged 17 percent a year," Farrell said. "But if you missed 40 of the best days, your return was around 3 percent."
His advice is to make a commitment and own stocks if you can live with volatility but keep your portfolio diversified.
"Mix and match the risk. If you do it well, your growth guy is not going to correlate with your value guy -- but it will keep you in the game," said Farrell. "If you're all in one style and it goes bad, that's the worst thing you can do if you want to build wealth over a long period of time."
His final piece of advice: Keep at least six months worth of expenses in cash. 
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