A funny thing happened on the way to the 3,000 level on the Dow Jones industrial average - the stock market was run over by a Mack truck. This should not, however, be cause for total despair in this quirky summer of hazardous investment travel.
First of all, the 3,000 level, even if you call it a psychological road sign, doesn't really mean much at all. There has been nothing scientific or technically compelling about the market's ascent this year, and logging its numerical breakthroughs doesn't really provide much of a road map.The 1990 investment trail, even with genuinely impressive upward slopes along the way, will be bumpy all year long. The only way for the average investor to cope is to make calculated long-term investment choices and stick with them. Buy the stock, not the market.
The seemingly imminent approach of 3,000 was being proclaimed by more blaring horns than a 10-car wedding party. Some of that psychological pressure may have actually helped cause the maddeningly contrarian swerve of the market.
You could pin the blame on Ronald McDonald, if you really believe that the proclamation of weaker McDonald's Corp. earnings were instrumental in helping send the market down. You could throw stones at the high-tech industry and its recent disappointments. But the fact is, underlying worries about corporate earnings, inflation, interest rates, the budget deficit, the savings and loan bailout and new taxes have been riding along with the investor all year.
As this column has pointed out before, most of them will still be along for the ride come Dec. 31. What the market has done on a given day has largely been a result of how bad or good any of these basic concerns looked on that given day.
The 1990 market has benefited from a large amount of cash awaiting investment and little competition from other vehicles. Yet shares have generally appeared to be expensive, unless you fervently believe that there's a likelihood of a strong economic resurgence to help keep profits strong.
So this is the market for 1990: A bundle of raw nerves that can be sent twitching at the next negative earnings disappointment, government figure or Washington pronouncement. An accident waiting to happen.
"It is the consensus view that there's been a soft economic landing, with the second half likely to be a little better, with interest rates and inflation a little lower," said Eric Miller, chief investment officer for Donaldson Lufkin & Jenrette. "But the fact is, worries will continue about this outlook." The biggest positive, Miller believes, would be a truly first-rate federal budget agreement, though he considers that unlikely.
John Connolly, senior vice president and chief strategist for Dean Witter Reynolds Inc., believes the economy is under control, yet expects the mixed bag of corporate earnings to continue. As a result, the price-to-earnings ratios of individual stocks will determine whether they're worth buying. "The worry is recession," warned Connolly. "After all, the housing and automobile industries are already in recession."
The key to the market the rest of this year will be the deficit-reduction talks in Congress, believes Michael Sherman, chief investment strategist with Shearson Lehman Hutton Inc. "A plus for the market is that this will be the seventh year of a shrinking of the amount of stock outstanding, which should serve to support the equity market," said Sherman.
All three strategists believe the Dow will make it to 3,000 and then proceed beyond it, but they're still making their selections on the basis of individual stocks rather than any marketwide trends.
Investing in oil companies looks better because their prices are low and the longer-term outlook is still good. Miller likes Royal Dutch Petroleum and Mobil Corp., while Connolly prefers Texaco Inc. and Atlantic Richfield.
Health-care firms Humana Inc. and National Medical Enterprises are attractive to Miller, as are stable choices such as PepsiCo and Procter & Gamble. Connolly takes a somewhat contrarian view on banks, liking both Citicorp and Chemical Bank.
Meanwhile, airlines look good to Sherman, particularly Delta Air Lines, AMR Corp. (American) and UAL Corp. (United). Despite disappointments, he's also fond of small growth company stocks such as Acuson Corp., Cadence Design Systems and Autodesk Inc.