Investing in stocks is never without risk. But in mid-1998, it seems an even dicier prospect than usual. Economies throughout Southeast Asia are seriously ill. And now the contagion is spreading into other countries. Yet U.S. stocks have been holding up remarkably well - and therein lies another problem. With earnings growth flattening and U.S. stocks still up 14 percent for the year, price-to-earnings (P/E) ratios are about as rich as they ever get. And this bull market is about as long in the tooth as bull markets ever get.
So how have U.S. stocks managed to turn in such an enviable performance? Due to a robust and resilient economy, says United & Babson Investment Report."Some slowdown in business activity almost surely lies ahead. If it doesn't, the Federal Reserve will likely step on the credit brakes with such vigor that we'll be thrown into recession. That's how bear markets usually get started - with the Fed lifting rates in an effort to fight off inflation. Fortunately, inflation remains no big worry now, and any second-half credit tightening should be limited. Long-term rates may even decline."
Stocks have also benefited from the billions of dollars that continue to pour into mutual funds, notes U&B.
The Wall Street consensus is that corporate earnings will pick up sufficiently in the second half to finish modestly in the black for all of 1998, observes U&B. Net per share on the Dow Industrials is expected to approach $450, for a gain of about 15 percent. The Dow is thus now selling at roughly 20 times these projected results.
At 9,500, the Dow would be commanding a P/E of about 21. And that's probably a "best scenario" guess for a '98 market top, says United & Babson.
Still, there are some individual stocks that the United & Babson report considers good buys. Its favorites: Avery Dennison, Cardinal Health, Cisco Systems, CMS Energy, Colgate-Palmolive, IBM, PepsiCo, Sherwin-Williams, Staples, Textron, Watson Pharmaceutical, Wolverine Worldwide.
There are also five big companies with above-average dividend growth that U&B considers good long-term holdings: Fannie Mae, GE, Hubbell, TECO Energy, United Technologies.
(United & Babson Investment Report, 101 Prescott St., Wellesley Hills, MA 02181; weekly, $238 annually)