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 isnormally viewed as a coincident indicator (i.e., it moves in the same directionand the same time as the economy), is still down in the dumps. Initial unemploymentclaims are a leading indicator, and they have been improving for the last threeweeks, an interesting sign. The unemployment rate is a lagging indicator, and that's just getting worse and probably will continue to do so in thenear term. Stocks and stock funds, also a leading indicator, normally byabout six to nine months, are also up. So a recovery yet? No. Signs of itcoming? Yes.

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

Clark:

The market will retrace, possibly down to the Sept. 21 lows or evenlower. This would be

the kind of damage to the market's psychology that thestimulus package would have a hard time countering.

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

Clark:

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

Long term, the markets, especially the bond markets, have not weighed in onthe long-term inflation outlook the stimulus package might bring with it. Thebond market is still taking a benign view of both the stimulus package and thelarge 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 agood sign, and can it continue leading the market higher?

Clark:

Tricky question. For the optimists, the tech sector (but not necessarilythe 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 11recessions, growth stocks (and growth funds) have outperformed valuestocks/value funds per a recent study by Salomon Smith Barney.

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

Historically, first-phase bull-market increases tend to be in stocksand 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 acyclical sector -- i.e., gets really beaten down by broad market declines and then,once the market bottoms, outperforms the averages. Energy stocks wereviewed the same way in the '80s. If this is your view, then now is thetime to ride the wave, at least until sometime in mid-2002 when thefundamentals mentioned above will probably take hold.