What's Going On? Fund Managers Give Their Views, and It Isn't Pretty

Yes, more suffering may be in store, they say. One suggests CDs.
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Just what is going on around here?

Yes, even before Thursday's meltdown, the tech-laden

Nasdaq Composite

was already down more than 34% this year, while the average tech fund was off more than 30% and the average big-cap growth fund -- where more investors' money resides than any other fund flavor -- was down more than 12%. And the

S&P 500

started Thursday down 7.8% on the year.

Things are so bad that fund managers are letting their money

sit in the bank, rather than buy stocks.

Over the last week or so, we've talked about how and why you might

rebalance your portfolio, perhaps by ratcheting down your exposure to tech or

bringing bond funds into the fold. Now let's ask some pros what they make of this mess; if their names are highlighted, click on them to check out a recent interview:

Frank Armstrong, Miami-based financial planner and chief investment strategist for DirectAdvice.com.

Pat Dorsey, director of stock analysis at Morningstar.

Jim McCall, manager of the Merrill Lynch Focus 20 fund.

Bill Nygren, co-manager of the Oakmark fund.

Jeff Van Harte, manager of the Transamerica Premier Equityfund.

Howard Ward, manager of the Gabelli Growth fund.

Where are we and how did we get here?

McCall:

I think the main thing was the recognition that the economy is slowing down. That causes a negative psychology to develop in the marketplace due to uncertainty over how much we're slowing. Then you've got this abominable election situation. People are saying it doesn't matter who wins, but they're missing the point. The uncertainty and the disappointment with the process saps investor confidence. That sends buyers to the sidelines and that just kills stocks.

Another thing is the impact of Regulation FD

the SEC regulation that curbs selective disclosure by companies that became a requirement on Oct. 23. It's disproportionately hurting the aggressive growth part of the marketplace because guidance from management is much more important there than it is for large-caps, like say,

Procter & Gamble

. Even I can build a reasonable earnings estimate for PG without talking to them. When companies stopped communicating with analysts about their

earnings estimates, analysts panicked and said, "I can't go out on a limb with

earnings models without some confirmation." So they reduced their estimates whether that was the right thing to do or not.

Dorsey:

Expectations simply got out of whack with reality. You had a lot of TMT

technology, media and telecommunications companies trading at 20, 30, 40 times sales, which are unsustainable valuations no matter how fast you're growing. It's that simple. The lesson is that when things sound too good to be true, they are.

Ward:

I think we're seeing a slowdown in the economy and a valuation correction in some excessively priced tech stocks along with an inventory correction, resulting from customers stockpiling tech equipment when it was in short supply. It makes the environment look more lethal than it really is. So, you've got analysts downgrading their earnings estimates when confidence is already at new lows.

Are we headed for a recession or is this just a natural correction after a frothy year?

Van Harte:

That's a good question. I think the market thinks we're headed for a recession. You see that with people heading for stocks in defensive sectors like energy, defense and pharmaceuticals. My own view is that we're headed for a soft landing and this is going to just be a valuation correction.

Nygren:

I think it's more of a valuation correction. I certainly don't think the market in general is being priced as if a hard landing is anticipated. But macroeconomic forecasts aren't as helpful as simply focusing on companies that look undervalued relative to their growth.

Ward:

I think people just expected too much for too long. This is a healthy thing that's overdue. It could be setting the stage for a great 2001. Risk and discipline had to come back to the marketplace. People got too greedy.

What's the biggest mistake an investor could make right now?

Armstrong:

Over-concentrating in last year's top-performing asset class

tech stocks. It's a proven formula for slitting your own throat.

Dorsey:

I think there are two. One is panic and start selling solid companies at the bottom. The second one is less obvious: Don't assume things are going back to the way they were last year. Don't assume your big-cap tech favorites are headed back to more than 100 times earnings. The message is that diversification works. Remember that in 1999 people that owned banks and insurers got laughed at and now they look pretty smart.

Don't assume we're going to go right back to Nasdaq 5000; tech is down but it's down from some pretty stratospheric heights.

Nygren:

It's very tempting to look at how much a stock is down from a peak and think that because that number is big, it must be a bargain. Investors will do far better if they focus on what a company earns now vs. what it's expected to earn over the next couple of years. That's a lot better than focusing on how far down a stock is after a bubble that might not be repeated in our generation.

I've said this before: We think the Nasdaq 5000 level we hit this year won't be deserved based on fundamentals for five to 10 years and it may be that long before it trades there again.

What would you do with $10,000 right now?

Van Harte:

I would not buy mutual funds right now given the taxable distributions many funds will have. I'd spread it among stock funds I like. I wouldn't put it all in at once either. I'd invest a set amount each month over the first six months of next year. I think the market will be tough at least through then.

Armstrong:

I'd invest in an index fund giving me access to stocks around the world. We'll all be emotionally scarred by what we're seeing in the market these days and there's no reason why the market won't go from grossly overvalued to grossly undervalued. But people with diversified portfolios can sleep a lot better and in the long term they won't lose out on returns.

McCall:

Buy a CD. I don't see support yet.