Where are the returns? - B.E. Investment Roundtable - Panel Discussion

Black Enterprise, Oct, 1992 by Carolyn M. Brown, Frank McCoy

Americans live in a peekaboo investment climate. First we see growth, then we don't. Initially, it appeared as though the nation was getting back on its feet. The first quarter saw 2.7% growth, positive corporate earnings and rising auto sales. But by June, the signs of an anemic economic revival were apparent. Unemployment rose to 7.8%; housing starts took their steepest fall in eight years, dropping 17%; and manufacturing was down 2.5%.

Even financial gurus can't forecast a full recovery. Falling interest rates, which led past recoveries, don't seem to be working. Since 1990, the Federal Reserve Board has cut the discount rate seven times, but little happened. And yields on savings have hit bottom, forcing more savers to abandon certificates of deposit and money-market funds.

But as bleak as the outlook is through December, 1993 looks promising. Major gains are possible in stocks, bonds, mutual funds and real estate, especially for investors with the know-how and wherewithal to wait out market cycles.

STOCKS

Stocks rise, stocks fall. They also offer the best investment returns, averaging 1D% over the last two decades. Individual investors are wary of stocks because of a bull market that has raged and retreated since 1991. The Dow Jones Industrial Average was the only market indicator to post gains the first half of this year. By comparison other indices, such as Standard & Poor's 500, sank.

Holders of economy-sensitive stocks, such as Ford Motor Co. and General Motors Corp., were rewarded with first-half price gains of more than 55%. The logical rotation of investment from growth stocks into cyclicals also was propelled by a brightening corporate profit outlook.

But the strong profit gains some investors anticipate in autos and other cyclical stocks may not materialize. And certain noncyclical stocks that were dropping--notably pharmaceuticals--may now be on the bargain counter. The upshot: There is money to be made in equities but investors should be wary.

BONDS

Crumbling faith in the equities market, the economic recovery and the impact of lower interest rates have led to increased investment in short and intermediate Treasury bonds. Long-term bonds yield about 7.9%, but their rates are likely to drop. And going out on a limb with a 30year bond is risking greater volatility in price.

In 1993, corporate bonds are expected to outperform government issues. Improving corporate profits attract investors, with the average issue paying about 8.89%.

Junk bonds also are enjoying a rebound, with an average 12.1% yield. But the junk bond market is unlikely to enjoy significant capital gains over the next 12 months. Finally, once interest rates rise, there's bound to be some fluctuation in bond prices. But the potential capital loss will be small unless rates rise sharply, which is unlikely.

MUTUAL FUNDS

Investors poured $88.5 billion into mutual funds through June 1992. But that record amount wasn't enough to keep mutual funds from taking a beating after 1991's superb performance. In the first six months of 1992, the average stock fund fell 2.7%. Small company funds took a 6.1% dip. The flip side: Funds specializing in bank and insurance company stocks enjoyed a 16.3% winning streak. A diverse group of large growth stock funds may make for a strong portfoIio next year.

Bond funds specializing in high-yield issues also are enjoying impressive gains. Still, your money may go further in value funds that invest in undervalued stocks with strong earnings prospects.

REAL ESTATE

With yields on conventional 30-year mortgages sliding below 8%, now may be the best time for homeowners to buy. Homeowners who haven't yet refinanced their double-digit mortgage should.

Buyers will not want to wait to snatch up bargain home prices as the median price of existing single-family homes sold has decreased nationally. And the market for new homes has remained flat. Home prices are expected to rise in 1993.

Other real estate sectors, including the commercial market, are starting to stabilize and revive. For individual investors, the easiest and least risky way to capitalize on real estate has been to invest in real estate investment trusts (REITs). They are enjoying a slight comeback, remaining slightly ahead of the S&P 500 in total returns with 1.2% versus 0.63%.

EXPERT FORECASTS

In June, BLACK ENTERPRISE convened a roundtable to solicit some choice investment advice from six of the nation's most astute stock analysts. They include John W. Rogers Jr., founder and president, Ariel Capital Management Inc., Chicago; Alan Bond, president and chief investment officer of Bond, Procope Capital Management Inc., New York; Peggy Woodford Forbes, president and chief investment officer, Woodford Capital Management Inc., New York; Maceo K. Sloan, president, CEO and chief investment officer, NCM Capital Management Group Inc., Durham, N.C.; Louis A. Holland, managing partner and chief investment officer, Holland Capital Management, Chicago; and Barbara Bowles, president of The Kenwood Group, Chicago.