The stock market keeps surging, despite an occasional blip. Can it keep climbing? Charles (Chuck) Carlson, investment newsletter editor and author, and BW's Jeffrey M. Laderman discussed the question.
Copyright 1997 by The McGraw-Hill Companies, Inc., licensed to America Online, Inc. All rights reserved.
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OnlineHost: Welcome to Business Week Online! The stock market keeps going up and up. Can it last? Or is it time to take your profits and run? Here to answer are Charles (Chuck) Carlson (DRIPInvest), author and market newsletter editor, and Jeffrey M. Laderman (JeffBW), BW senior writer specializing in the stock market and mutual funds. The moderator is Jack Dierdorff (JackBW) of BW Online.
JackBW: Good evening to all of you on AOL. Chuck Carlson, thanks for joining us, and hi to my BW colleague, Jeff Laderman.
JeffBW: Hi, Jack. Hi, Chuck.
DRIPInvest: Hi, Jack.
JackBW: Let's start with this very timely question.
Question: Was Friday's market drop just a blip -- or a signal that the bears might be moving in?
DRIPInvest: I think the bull market is very much intact. I, however, wouldn't be surprised to see this market pull back a bit in the near term. Indeed, I would not be surprised if the market corrected 400 to 600 points over the next three months -- something similar to the March/April correction. You see, one of the tools we use looks at the percentage of stocks trading above their 200-day moving averages on the NYSE. This percentage is above 82%. This is a very high-risk area for the market's intermediate period.
JeffBW: I agree with Chuck that the bull market is intact. But this market has gone so far so quickly, it probably needs to cool off a bit. The economy is still good, inflation is in check, and profits are coming in better than expected, so the bull market should keep on rolling along.
JackBW: URCovrd has a question that bears on the title of this event: whether it's time to sell.
Question: What is your prediction for the Dow in the next year?
DRIPInvest: I would not be selling stock right now. Granted, I wouldn't be surprised to see a pullback, as I said. However, such pullbacks often occur too quickly to trade. I think the prudent approach is to hold stocks and use pullbacks to add to stocks. I think people who tried to trade stocks in the March/April correction were left on the sidelines when the market exploded. That's the risk of selling stock at this time. Remember -- this is still a bull market. I think the Dow will be above 9000 a year from now.
JeffBW: I'll go with the bull market, but I don't make predictions on the Dow.
JackBW: URCovrd has another question.
Question: What sectors do you expect to outpace the market? Any specific stocks?
DRIPInvest: I like the agricultural stocks. I especially like New Holland NV. The company is a Dutch producer of tractors and combines. The stock trades on the NYSE. I also like telecommunications stocks. I like SBC Communications. I also like Lucent Technologies, although it may be a tad high right now. I also like security stocks. In this group, I like Pittston Brinks.
JackBW: Jeff:Laderman of BW, this question from Miguel E is a familiar variety to you.
Question: Should long-term retirement investors basically ignore all the hype and invest in what they like?
JeffBW: What do you mean, what they like? Not sure I understand the question. What hype?
JackBW: How about some general guidance for retirement planners/investors?
JeffBW: Sure. First, come up with an asset allocation game plan. That means look at your years to retirement, and assess if you can take the risks of an all-equity portfolio. Remember, equities outperform bonds over long periods of time, but not necessarily in any few years. Then try to develop a good mix of mutual funds that capture different segments of the market -- large-cap, small-cap, value stocks, growth stocks, and don't forget foreign stocks. Keep an eye on the holdings, but don't trade them.
DRIPInvest: The one thing I'd like to add is that investors should not forget to have foreign exposure. I think a retirement portfolio having at least 20% in foreign funds or equities is prudent for long-term retirement planning.
JackBW: BiGbOb387 has a short time horizon -- any thoughts, Chuck Carlson?
Question: I was interested in making some short-term investments for a year or two -- what would be a good place to invest?
DRIPInvest: While I don't claim to be a good short-term trader, I would look at telephone-related stocks. I think some of these are cheap now. Furthermore, I think you'll see continued takeover developments in the group. In the group, Frontier is an interesting stock for takeover speculation. Also, I think Sprint's days are numbered as an independent entity.
JackBW: Another question on what parts of the market to look in for good buys.
Question: Will blue chips continue to be strong, or will small caps return more?
DRIPInvest: I think that blue chips will be the best group as long as the current bull market lasts. That's because investors like the liquidity of the blue chips. Also, I think the need to have overseas exposure is driving a lot of investors to buy the big U.S. multinationals.
JackBW: Either of you ready to opine on Apple -- and Oracle?
Question: Will [Oracle Chief Larry] Ellison's interest in Apple again lower Oracle's stock value?
DRIPInvest: Apple is a dead company. The only hope is a bailout. Heck, Jobs wouldn't even touch it at this point.
JackBW: Spitz913 has a very basic personal finance question. Advice, Jeff?
Question: Don't have a lot of money to invest -- thinking of getting married soon. Want to start saving for the future, but still have lots of credit bills. Where do you think I should start investing?
JeffBW: I'd say pay down your bills before you start investing. After that, I'd start with some good no-load mutual funds. You get the most bang for the buck that way. If you only have enough to start one account, I'd go with something global -- that way, the fund takes in both U.S. and foreign stocks. Once you've accumulated enough to open other fund accounts, you can get more specialized.
JackBW: Keara2 in Connecticut has a pointed question, if things are as rosy as we are saying.
Question: If all conditions are good, why a correction?
DRIPInvest: When things are at their best, that's usually when the market will turn the tables on us. There's a cliche in Wall Street that stocks climb a "wall of worry." When there's no worry among investors, that's when I worry.
JeffBW: Probably one reason we haven't had a correction lately is that so many people are worried about the market, about overvaluation, about a dive, that it's not likely to happen. If it looks like it's going down for a while, there will be even more cries of crash. But usually when the cries get loud enough, new money comes in from the sidelines. As long as there are worrywarts out there, the market won't get into too serious a situation.
JackBW: Skylinepa has a question for BW Online's guests next.
Question: Experts say to research stocks before you buy. What three most important things do you look for in a stock?
DRIPInvest: Good question. I look for (1) strong finances, (2) industry representation, (3) track record of earnings and dividend growth. Of course, there are a lot of other factors to consider. However, these are three good places to start. The strong finances are especially important if you are a long-term investor. Strong finances will keep your company in the game longer.
JeffBW: I'd also like to know if there is a catalyst that's going to drive the stock higher. For instance, is there new management, or a new product, or is it a small company that is starting to get noticed by the big Wall Street firms and institutional investors? Otherwise, good stocks can sit there a long while and nothing happens.
JackBW: Someone just asked whether the Dow will hit 10000 by January, and now comes DGorewitz with this one at the other extreme.
Question: Doomsayers are saying the Dow will be at 5000 within two years. Any guesses as to the probability?
DRIPInvest: I don't think you'll see either scenario over the next 12 months. I think we've seen the biggest gains in the Dow this year. Likewise, I think a correction, worst case, would drop the Dow to the 7000 level.
JackBW: SLehner72 cites a major factor in the market's rise.
Question: Do you agree that with increasing participation in 401(k) plans, the market will simply continue to be pushed? Where else will the money go?
DRIPInvest: Yes, I think there is something to be said for the liquidity aspect of this market.
JeffBW: Sure, there's plenty coming in through the 401(k)s, but don't forget that defined-benefit pension plans are net sellers -- not buyers -- of stocks, and individual investors have also been net sellers -- not buyers -- of stocks. So if the 401(k) is kind of replacing others as a support of the market, it's not necessarily pushing it higher and higher, as long as other market participants are pulling money out.
JackBW: Chuck, Jim2 wonders about a company much in the news, MCI.
Question: O.K., guys -- MCI: hold, sell, buy?
DRIPInvest: I would "hold" MCI best case; I wouldn't argue someone out of selling it.
JackBW: Here's BobAB with another company to ask Chuck about.
Question: Chuck, if you like Pittston Brinks, what do you think of Pittston's coal business?
DRIPInvest: I think Pittston Minerals is probably undervalued. However, I'm not a huge fan of natural-resource companies. I rate the stock a "hold."
JackBW: Next we turn to StevenS96.
Question: Do you like index funds that track the market in general?
JackBW: Jeff, you're BW's fund expert. Want to lead off?
JeffBW: If you want to own the large-cap stocks, there is no better way to do it than the S&P 500 index fund. The operating expenses are about 1 percentage point a year less than the average fund's. And most fund managers have had an awful time beating the S&P. The conventional wisdom is that index funds are less effective for small-cap or international stocks, but the folks at Vanguard would take issue with that. The thing to keep in mind about index funds is that they work best in a bull market. That's because they're 100% invested. If you went through a bear market, they would not look so wonderful relative to the other funds. Actively managed funds would likely outperform.
DRIPInvest: I agree with Jeff. I like index funds for the S&P and would suggest that an equity portfolio of funds have at least one quarter in an index fund. I might disagree with Jeff a bit on expectations of actively managed funds outperforming index funds during down markets. While this is probably true, I can remember 1994, when the market was basically flat. Most actively managed funds were beaten by the S&P 500.
JackBW: Keara2 is back with this one.
Question: 9000 is only a 10% gain from here -- sounds like a tired bull. Would you be going more into bonds at this point?
DRIPInvest: I think it depends on your long-term focus. I am not a huge fan of bonds. However, I think intermediate to long-term bonds will do reasonably well over the next 6 to 12 months.
JackBW: PHANTAM has a pretty long-term question here.
Question: Where do you see technology stocks going in the next three to five years?
DRIPInvest: I think technology stocks will move irregularly higher over that time frame. The problem with tech stocks, however, is that there will likely be huge sell-offs over that time. Furthermmore, picking "long-term winners" is difficult due to the technology issues involved. Thus, I don't do much in technology. I'm just not smart enough to follow the group as closely as I think you need to.
JackBW: Chuck, JReiche45 has another question about a slice of the market, albeit a smaller one.
Question: What is you opinion of personnel service stocks with the job market so tight? In particular, Personnel Group of America. Their earnings have been strong.
DRIPInvest: I don't follow that particular stock that closely. However, overall, I like the group. I also like stocks that cater to businesses, providing various services. One company I like here is Paychex. The company is the largest provider of payroll-processing services for small and medium-sized companies. If you believe in the entrepreneurial spirit in this country and the likelihood of greater business creation, this one should be a winner.
JackBW: SSKAN's question goes to the bottom line of what we're discussing -- time to buy, or sell?
Question: Should I put more money in mutual funds or stocks right now?
JackBW: Is it still time to buy?
DRIPInvest: I would go a bit softly in terms of new buying right now -- especially if an investor is already aptly situated in stocks (75% or more equities already in a portfolio). I feel such investors have the luxury of being patient here and waiting for better buying opportunitieis.
JackBW: Jyant Kil wonders about a commodity crucial to the markets and the economy.
Question: Where do you see oil prices going in the next year?
JeffBW: Provided there are no disruptions in the Mideast or something like that, oil prices should remain around $18 to $20 a barrel. If you remember the late 1970s, people said we would have had $100 a bbl. oil years ago. But the fact is, new technologies like 3-D seismographics and horizontal drilling are finding new oil in old deposits, and heck, they're even doing a lot of new exploration in the U.S.
DRIPInvest: I don't see much rise either. I still like the major oils for one- to two-year gains.
JackBW: MPenney32 moves us into biotech.
Question: What do you think about Genzyme, and which stock do you see a future in?
DRIPInvest: We aren't big in biotech. I think Amgen will do well. I also think a stock like Mycogen, which is a biotech in the agricultural area, is an interesting stock.
JackBW: Patty2CL asks about a competitor to the market for retirement investing.
Question: What do you think of variable life insurance policies as a means of investment for retirement?
JeffBW: I'm not that familiar with variable life. I know a little more about variable annuities, which are sort of mutual funds in an annuity wrapper. The problem with these products, though, is that they often have high fees and penalties for early withdrawal. The attraction is tax deferral, but with the new low, low tax on long-term capital gains, it may well be worthwhile to stick with stocks and mutual funds.
JackBW: If we get the correction Chuck sees, Short33 wants to know what to do. Chuck?
Question: Should you buy during a correction? Hold? Sell?
DRIPInvest: I would regard any correction as a pullback within a bull market. Thus, I would feel comfortable adding to stocks during that time.
JackBW: MQOH has an interesting angle.
Question: Do you know where the majority of [investment] managers were during the '87 crash? Also, what percentage have been with the same fund more than three years?
JeffBW: If you look at the number of funds today vs. 10 years ago, it's easy to say that most of the fund managers on the job today were not on the job then. O.K., many -- not most. But at the end of the day, where does that kind of analysis get you in terms of understanding the stock market and making decisions? If it bothers you, don't invest in a fund with a young manager.
JackBW: Miguel E has a follow-up for one of Chuck's answers, on what to look for in a stock.
Question: DRIPInvest says look for strong finances. Is this always true for small caps?
DRIPInvest: I think strong finances should apply to any company -- ESPECIALLY small caps. Indeed, small caps are probably even more at risk during poor market periods. Thus, they need to be strongly capitalized.
JackBW: A follow-up to that follow-up, from Short33.
Question: Does "strong finances" mean low debt to capital, or price to book, or price to earnings?
DRIPInvest: I look at strong finances as primarily low debt to capital, strong cash assets, and good cash flow.
JackBW: You recommend foreign stocks, but European economies are weak. Thus here comes SJDOWERS.
Question: Is Europe a possiable place to invest right now?
DRIPInvest: I like Europe right now. I'm finding decent values in a variety of Dutch and Danish companies. I like New Holland NV and Norsk Hydro NV, two Dutch companies. I also like Aegon NV, a Dutch financial-services firm.
JackBW: OK, guys, Kshirsaga wants you to stir the entrails and predict Alan Greenspan's next move.
Question: Do you expect Greenspan to raise interest rates this month?
DRIPInvest: No.
JackBW: Jeff?
JeffBW: Not on what we've seen so far in the economic data.
JackBW: And that's good news for the stock market, right?
JeffBW: Yes.
DRIPInvest: Yes. But I think the market is already reflecting this.
JackBW: Here's another long-term question, from FireFly87.
Question: Do you think that when the baby boomers retire, they will all sell their stock and affect the market?
JackBW: Too long-term to answer with any accuracy?
DRIPInvest: Not necessarily.
JeffBW: It's a big generation, some 20 years, and they will be selling stock over time. But certainly nobody sells all their stock the day they retire. It's a gradual process, and we don't know what the buy side of the market will be then. So don't get gloomy about it.
JackBW: Chuck Carlson, before we sign off, tell us a little about the book you have coming out soon from McGraw-Hill.
DRIPInvest: Thanks, Jack. The book is called "Chuck Carlson's 60-Second Investor." The book provides 201 tools, tips, and tactics for the time-strapped investor. It is a book geared to beginners. It will be available in September.
JackBW: I should mention that the "60-Second Investor" will be Chuck's fourth
investment book. And Jeff Laderman has a book, too.
JeffBW: Yes, it's Business Week's Guide to Mutual Funds. The seventh edition is now available -- $14.95 paperback -- and you can find it in bookstores or here in BW Online on AOL.
JackBW: Here on AOL you can go to BW Online (keyword BW) and then from BW Plus! find Investors Central and Mutual Fund Corner, full of information for investors. Now, thanks to our two guests, Chuck Carlson and Jeff Laderman, for their sprightly answers to the many questions.
DRIPInvest: Thanks, Jack. It was fun.
JackBW: And thanks to the audience for the questions. Sorry we didn't have time to use many more of them.
JeffBW: Thanks, Chuck.
DRIPInvest: Thanks, Jeff.
JackBW: A transcript of this conference will be available soon. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1997 by The McGraw-Hill Companies, Inc., licensed to America Online, Inc. All rights reserved.
