Investments May Pay as War Looms

Investors brave enough to buy stocks now stand a good chance of being rewarded in the long run, many analysts and portfolio managers argue.

So why doesn’t anybody seem to be listening?

“The values of a lot of companies have been hurt, but not as much as these share prices indicate,” said Bill Nygren, manager of the Oakmark and Oakmark Select stock mutual funds. “These companies may be in for several months of pain, but we look out several years to estimate a company’s long-term business value. I liked my portfolio before Sept. 11, and I think it’s far more attractive now.”

But the prospect of war and the increasing likelihood of U.S. and global recession in the wake of the Sept. 11 terrorist attacks have paralyzed investors with fear, analysts say.

“You can’t get a historical parallel. We are boxing with a ghost,” said Richard Cripps, chief market strategist at Legg Mason Wood Walker. “The market is oversold, but there is always an intangible factor to stock prices and an irrationality that they can reflect. You have to let it run its course.”

So far, the course has been rough.

The Dow Jones industrial average’s 14.3% plunge last week was its worst weekly performance since 1933. The technology-dominated Nasdaq composite index sank 16.1%. The wipeout erased an estimated $1.4 trillion in stocks’ market value.

So far this year, the average U.S. stock mutual fund is down 26.2%, which would already make it the worst year ever for fund performance.

As bleak as the market looks, many observers say there are several reasons for optimism, including historical precedent after previous global crises; the Federal Reserve’s continuing efforts to stimulate the economy; and internal market conditions indicating that the selling finally may be reaching a climax.

Investment returns after 16 events that heightened international tensions during the 20th century--from the 1914 assassination of Austrian Archduke Ferdinand to the 1999 U.S. bombing campaign in the Balkans--have generally been positive, according to a study by Instinet Research in New York.

Russ Koesterich, equity analyst at Instinet, notes that the stock market rose an average of 10.3% in the 12 months after the international crises--roughly the stock market’s long-term historical average.

And the jolt to the market after an international crisis has generally been far less severe in times when the market already had been in a down trend, as it was before Sept. 11, he said.

At the time of the Cuban missile crisis in October 1962, for example, the stock market and the economy already had been weak, but the Standard & Poor’s 500 index rose 13% in the three months after the crisis and 26% in the next 12 months.

“We’re all dealing this time with something we’ve never seen before, but the Cuba situation had a similar feel in terms of the magnitude,” Koesterich said.

Consumer confidence will be crucial in determining the market’s direction from here, Koesterich said. After nine crises from 1962 through 1999, the S&P; gained an average of 17.2% in the next 12 months when confidence rose, as measured by the University of Michigan’s survey, but fell an average of 4.8% when confidence waned.

The problem, economists say, is that consumers had been the last bastion of economic strength, and the terrorist attacks have shaken that confidence. A report due out Tuesday from the Conference Board is expected to show consumer confidence at its lowest since June 1996.

The effects are being felt not only by such industries as airlines and hotels but also by retailers, restaurants, casinos, theme parks and many others.

“Even before Sept. 11, we were heading into the first synchronized global recession since 1974,” said Bill Ryder, strategist at First Union Securities in Richmond, Va. “The consumer confidence numbers going forward are likely to be very scary.”

Still, though evidence surfaced last week that individuals may be cutting back on new fund purchases and becoming more conservative in their investment decisions, they don’t appear to be panicking.

Jerry Fitch, chief financial officer of TDK Semiconductor Corp. in Irvine, sold a few stocks early last week simply to raise a little cash.

“I’m just being a little more conservative,” he said. “I think you have to build your portfolio around the idea of a sustained war effort, which is something our generation has never really had to do.”

Naturally, how the news unfolds is likely to play a huge part in how consumers and investors react.

Ryder noted that the market was struggling in late 1990 as U.S.-Iraq tensions mounted, but stocks “took off when the bombs started flying” on Jan. 17, 1991, and it became clear that operation Desert Storm was winnable.

But in last week’s speech to the nation, President Bush “tried to prepare the country for the worst” in terms of loss of life and indicated that this struggle against terrorism could take a long time, Ryder noted.

The danger of more terrorist attacks against Americans also looms large.

“Any additional attack on U.S. soil would undermine confidence in a serious way,” Koesterich said.

One of the main factors working in the market’s favor, however, is that the Federal Reserve cut interest rates again and has been pouring liquidity into the market.

“The Fed is so on the case,” Ryder said. “That can’t be ignored.”

Still, U.S. corporate profit estimates continue to fall, and many portfolio managers say hopes for an economic rebound have been pushed back to next spring at the earliest.

As Steve Colton, manager of the Phoenix-Oakhurst Growth & Income mutual fund in Scotts Valley, Calif., put it: “Professional investors are throwing this year away.”

Optimists point out, however, that the stock market tends to anticipate economic shifts as investors look to the future, so the market could solidify and start to recover months before the economy does.

Most bullish of all, says John Bollinger, head of Bollinger Capital Management in Manhattan Beach, is that the market “is more oversold than I can ever remember.”

Virtually every industry group has been in a down trend, he said; professional sentiment shows there are more bears than bulls for the first time in three years; and investors trading options to bet on the market’s direction have been extremely bearish.

In other words, the selling could be nearly exhausted, he said.

“One hundred percent of the preconditions for a major stock-market bottom have been met,” Bollinger said. “Now it’s up to us to find the catalyst that will start a rally.”

The fact that no catalyst appears to be in sight does not dismay him.

“Just as we could never have imagined that the World Trade Center would disappear, we have no idea what the outlying event will be that helps us recover from here,” Bollinger said.

Times staff writer Kathy M. Kristof contributed and Reuters and Bloomberg News were used to compile this report.

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LOST WEEK

Last week was one of the worst in the history of the U.S. stock market as aftershocks from the Sept. 11 terrorist attacks continued to be felt on Wall Street. Here’s how some major indexes fared:

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Index Pctg. change Last week 12 mos. Dow transports -23.2% -20.9% Nasdaq composite -16.1 -62.6 Dow industrials -14.3 -24.1 S&P; small-cap -14.0 -16.2 S&P; mid-cap -13.4 -23.3 S&P; 500 -11.6 -33.3 Dow utilities -5.6 -15.7

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WINNERS AND LOSERS

Only three of the 87 industry groups tracked by Standard & Poor’s managed gains last week. Companies tied to the travel industry--which is withering in the aftermath of the attacks--fared the worst.

Best-performing stock sectors last week

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Sector Weekly change Defense electronics +37.0% Gold mining +9.5 Telecommunications +0.1 S&Ls; -1.5 Publishing -2.1 Tobacco -3.3 Can and bottle makers -3.5 Soft drinks -3.7 Utilities -4.0 Insurance brokers -4.4

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Worst-performing sectors last week

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Sector Weekly change Brokerages -19.8% Trucks and truck parts -19.9 Auto parts -21.1 Steel -21.2 Automakers -21.4 Conglomerates -21.4 Semiconductors -23.9 Photography -27.9 Airlines -29.6 Hotel/motel -31.6

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Source: Bloomberg News, Standard & Poor’s