An ancient story has a hick admiring the bankers’ and stockbrokers’ yachts riding high in New York Harbor. “And where,” he asks naively, “are the customers’ yachts?” Stockbroker Fred Schwed swiped that joke for the title of his immortal book on the brokerage (“quote-and-fib”) business, published in 1940 and, blessedly, still in print. To update, just substitute “recession” or “correction” for “depression” in the quote. Buy stocks when things get so bad that politicians make speeches and the bull-market babies program their V-chips to block CNBC.
How bad: So how bad are things, anyway? Not serious, in the majority view. You’re seeing a classic business-inventory cycle. Blinded by optimism, all kinds of businesses–not just techs and telecoms–built more capacity and ordered more stuff than they can sell today. Now they’re pulling back, to work off the excess. “The slowdown was sharper than we forecast,” says economist Ben Herzon of Macroeconomic Advisers in St. Louis. “But if final sales keep growing at current rates, it’s just temporary.”
Other economists think it could be a year before business is up and running again. They see post-bubble risks–the global slowdown, scared investors, too little consumer savings, too much debt, higher unemployment, the shocks absorbed by folks who owned techs wall-to-wall in their retirement funds. Boomers have 14 fewer years to catch up than they had after the Crash of 1987.
Technically, the economy may skirt recession (defined as at least two quarters of decline), but “it’s the change from high growth to lower growth that counts,” says Allen Sinai, chief global economist for Primark Decision Economics in New York. “In the months ahead, it’s going to feel more like a recession than it does today.”
Naturally, someone must be to blame. Ah, Alan Greenspan! Who else? The difference between a god and a goat is 2,000 points on the Dow. But it’s not clear that the Fed’s monetary magic failed. The first quarter looks pretty good, consumer spending picked up and home sales are strong. For a quick insurance policy, Congress might try a cut in tax withholding for the middle class. (The rich are doing OK. After all, they’re rich.) Those cuts should come now, or there’s no point.
Buy now: Enough of this dithering, let’s get to the real question. Should you buy stocks now? “Yes,” says economist Irwin Kellner of Hofstra University. “Every time the Fed has cut rates by this much this quickly, stocks have gone up.” What’s more, further rate cuts lie ahead–maybe as much as one percentage point. Investors have panicked and politicians are making speeches. What else are you waiting for?
Back to Fred Schwed. He wrote that he never knew anyone who followed his system because you have to buy stocks when they’re universally despised. But think about it: someone gets the stocks that the suckers sell.
If following Fred would leave you pale, yet you’re holding a hot stash of cash, consider investing gradually–a bit per month, over the next few months. Assuming that stocks bottom and rise within that span of time, you’d get an average price without having to worry where the low point is.
Steady investors with 401(k)s should keep plugging away. Since World War II, stocks have averaged 12.7 percent a year. You got higher returns since 1990 (14.5 percent) and might get subpar returns in the decade ahead. But long-term, well-diversified buyers will do fine.
A harder question is which stocks to buy when you’re looking for something other than mutual funds. Qubes (ticker symbol: QQQ) are the Nasdaq speculation of choice. A Qube trades like any other stock, but it’s not a separate company. Instead, it tracks the index price of Nasdaq’s top 100 stocks. That makes it the easiest way of betting on a rebound. Trading volume is running at more than 95 million shares a day–a huge increase in recent months.
Picking companies is another matter. You’re sick of the analysts who touted techs and Nets (they’re either brilliant or crooked, depending on which side of March 2000 you’re speaking from). You’re no longer willing to own “great” companies at any price–think AT&T, Lucent, Microsoft, Xerox, Cisco, Intel. Cincinnati planner Michael Chasnoff says he has a lot of Procter & Gamble clients who have postponed retirement due to their losses in P&G’s profit-sharing trust. (Moral: diversify away from employer stock.)
How about pouncing on stocks whose earnings are going up? “Even under the best of circumstances, quarterly or annual earnings are very poor predictors of subsequent stock performance,” says Baruch Lev, professor of accounting and finance at New York University. Three- to five-year growth projections aren’t any better. “Forecasters still haven’t lowered their long-term forecasts for the big tech stocks,” says Wharton professor and growth-stock guru Jeremy Siegel. “Those techs are still overpriced.”
Lev says that individuals should make sector bets. Pick an industry you think might outperform, then undertake an old-fashioned analysis of each promising company’s financials, management and R&D. Do you like cyclicals, auto, financials? Do you know why? If you can’t do the heavy lifting, he says, stick with index mutual funds.
The ‘29 Crash ruined Wall Streeter Benjamin Graham. Eking out a college instructor’s living, he figured there must be a better way of investing–and produced, with coauthor David Dodd, the seminal book on valuing stocks, called “Security Analysis.” Today they’re called “value stocks,” as opposed to no-value stocks. Try them, for a change.
