Meet the Street: Not Out of the Woods Yet

While mutual fund investors are probably not yet euphoric about equities, having poured $73.5 billion into money markets and $12.5 billion into bond funds in October, according to the latest numbers from Lipper, the recent run-up in the equities markets since Sept. 24 has created some excitement.

Andrew Clark, Research Analyst, Lipper

Recent Meet the Streets

FuelCell Energy's, Jerry Leitman

Lipper's, Jeff Tjornehoj

Deutsche Bank Alex. Brown's, Douglas D. Mitchelson

Columbia University's, Bruce Greenwald

But Andrew Clark, a research analyst with Lipper, says now is still not the time to put all of your chips into the market, and particularly into the tech sector, which has largely led the latest rally. Too many signs show that the economy has not recovered yet, and technology stocks tend not to be the ones that rebound first. As for those investors who are betting the ranch on bonds, Clark also warns against the potential for inflation to creep in.

TSC: Has the economy turned?

Clark: The short answer to this is no. Industrial production, which is normally viewed as a coincident indicator (i.e., it moves in the same direction and the same time as the economy), is still down in the dumps. Initial unemployment claims are a leading indicator , and they have been improving for the last three weeks, an interesting sign. The unemployment rate is a lagging indicator, and that's just getting worse and probably will continue to do so in the near term. Stocks and stock funds, also a leading indicator, normally by about six to nine months, are also up. So a recovery yet? No. Signs of it coming? Yes.

TSC: What will happen if the recovery doesn't come as quickly as people would hope?

Clark: The market will retrace, possibly down to the Sept. 21 lows or even lower. This would be [the] kind of damage to the market's psychology that the stimulus package would have a hard time countering.

TSC: What effect do you think the federal government's stimulus plan will have on the economy and the markets?

Clark: Short term, it's already baked in. The risk is any substantial change to the package as it now exists, or a long, drawn-out fight between the president and Congress. The market really doesn't like uncertainty.

Long term, the markets, especially the bond markets, have not weighed in on the long-term inflation outlook the stimulus package might bring with it. The bond market is still taking a benign view of both the stimulus package and the large amount of liquidity the Fed is pumping into the system these days. Noises are being made, but there's no consensus yet.

TSC: The tech sector has been leading this most recent run-up. Is this a good sign, and can it continue leading the market higher?

Clark: Tricky question. For the optimists, the tech sector (but not necessarily the telecom [companies]) has been beaten down enough that on a selective basis [tech stocks] are a good buy. History is also on their side, as in the past 11 recessions, growth stocks (and growth funds) have outperformed value stocks/value funds per a recent study by Salomon Smith Barney.

On the economic/fundamental side, chances are that investment in new equipment will not be one of the first purchases of recovering companies. This sort of investment historically has happened in the second phase of a recovery, along with energy producers and consumer durable producers, as an example.

Historically, first-phase bull-market increases tend to be in stocks and funds that are related to household consumption and investments, i.e., banks, consumer finance companies, utilities, retail stores, etc.

The issue here, then, is whether or not tech (and possibly telecom) is now a cyclical sector -- i.e., gets really beaten down by broad market declines and then, once the market bottoms, outperforms the averages. Energy stocks were viewed the same way in the '80s. If this is your view, then now is the time to ride the wave, at least until sometime in mid-2002 when the fundamentals mentioned above will probably take hold.