Can early January's strength in the stock market continue? Unquestionably, it can. But whether it will is another matter, one that nobody can predict--as witnessed by the fact that the market's current surge is surprising even the few who saw it coming. Michael Metz, portfolio tactics analyst at Oppenheimer & Co., said in December--when others foresaw a slow January--that the market would come out of the gate with a rush in 1987.
On Monday, as the market rose for the seventh-straight session, Metz said he is impressed with the breadth of the advance, but he still thinks the market will break and decline in 1987 because factors that held it up in 1986--takeovers, falling oil prices--will be mostly absent.
On the other hand, Al Frank of Santa Monica, who publishes a market newsletter called the Prudent Speculator, thinks foreign investors will keep the market rising until Election Day, 1988, when it will collapse from exhaustion. You'll know the end is nigh, Frank said, when stocks of small and medium-sized companies start rising rapidly for no apparent reason.
Return and Risk
Whom do you believe? Nobody. You make your own decisions as to how much to invest in stocks or mutual funds, keeping in mind that, historically, the stock market is supposed to offer a return of 6% more than a risk-free investment.
That is, with Treasury bills yielding 5% and less, stock market investments today should give you a 10% to 11% return (both dividends and capital gains), which is not bad if you can get it without too much risk to capital. At 10%, your money doubles in just over seven years if it's in an IRA or other tax-deferred fund.
How much risk is there in the market today? Probably less than a lot of people are saying. In fact, the gloom is so thick among some economists that it is probably a bullish sign for the U.S. and world economies.
Economist A. Gary Shilling, for example, predicts a recession based on the long-wave theories of Nikolai Kondratieff, a Soviet economist of the 1920s who claimed that capitalist economies move in long cycles characterized by rising and falling prices. Present-day followers of Kondratieff--who died in a Siberian prison camp in the 1930s--look at falling prices for food and other commodities and see us on a 1930s-like declining wave.
Should you pay attention? No. That is crackpot stuff, relying on inexact historic parallels. The truth is, there is as much reason for optimism as pessimism in the present situation.
To begin with, food prices are low because crops are good almost everywhere. India is not starving; nor is China. Agricultural success in the world's most populous countries might reduce markets for U.S. grain, but surely it could expand markets for Deere & Co. of Moline, Ill., the world's largest farm equipment maker.
Why not think positive? If copper prices are down, it's not because the world economy is grinding to a halt, but because telephone cables now use the more efficient glass fibers, and semiconductors cut down on the use of copper in electrical equipment. If the price of oil is down from the expensive heights of the 1970s, can that be bad for economic growth?
Enough philosophy. How can you make money in the market? Probably most safely with a mutual fund. Chairman John Bogle of Vanguard Group suggests keeping it simple, perhaps in a mutual fund that reflects the Standard & Poor 500 or other major stock indexes.
Otherwise, for individual stocks, the only thing to do is buy them cheap and--if you don't take them too seriously--there are scores of systems to help you determine what is cheap.
Kenneth Fisher, a San Francisco-based money manager, has one of the simplest, called the price-to-sales ratio. You take the company's total market value--its stock price multiplied by the number of common shares outstanding--and compare it to the firm's annual sales. For a variety of complicated reasons, a company selling for less than its total sales could be a relative bargain--the operative word being "could."
For example, Deere & Co. is selling currently at around 42% of its total sales, but its plants are shuttered by a labor dispute and it is losing money as the farm crisis continues. In the same vein, Halliburton Co. is selling at around 62% of its total revenues, but Halliburton is the leader in oil well servicing, and things are still slow in oil. General Motors' total market value is less than 20% of its 1986 sales, but of course cars are a glut on the market and its management problems are well known.
Can such companies come back? Well, there are of course no easy formulas to give you the answers. But the words of the legendary Bernard Baruch, who made millions as a stock market speculator early in this century, do come to mind. "Value in an investment," Baruch said, "is like character in an individual--it stands up better under adversity and overcomes that adversity more readily." Draw your own conclusions.