Wall Street team, stressing de-fense, looks to consumer stocks

When the Chicago Bears are struggling, Walter Payton gets the pigskin. When the Boston Celtics can't find the hoop, Larry Bird flies into action. And when the economy sputters, team Wall Street turns to its clutch performers. Once again, money managers are handing the ball to the blue-chip consumer stocks -- drugs, foods, household products, tobacco -- and the interest-rate-sensitive financial issues.

``A month or so ago, the economy looked like it was picking up and you saw a classic rotation away from defensive consumer stocks . . . into aluminum, autos, metals -- the cyclicals,'' says Larry Greenwald, co-manager of equity trading at Sanford C. Bernstein & Co. ``Now the market is back looking for companies with safe, secure earnings in an economy that's very iffy.''

It's not that investors wouldn't like to switch into the cheap, economically sensitive stocks. But picking the right ones in a patchwork economy is proving difficult. And fraught with false hopes.

Expectations of a hale and hearty second half were dashed last week when the Commerce Department reported that gross national product in the third quarter grew at a 2.4 percent annual rate. Not bad. Better than the flaccid 0.6 percent growth rate of the previous quarter. But Wall Street runs on expectations, and when they go unfulfilled, investors react negatively.

Of course, one could be choosy last week about which numbers to believe. Orders for big-ticket items -- appliances, heavy machinery, aircraft -- surged 4.9 percent in September. It was the biggest gain since 1984. But economists busily slashing their growth projections warned that the purchasing was tax reform induced and would dry up quickly.

Earnings reports were equally mixed. Ford Motor Company doubled its third-quarter profits, while earnings at General Motors Corporation and Chrysler Corporation sank 49 percent and 26 percent, respectively. Phillips Petroleum Company's net climbed 21 percent, while Amoco Corporation plummeted 97 percent. John D. Connolly singles out the weak quarterly earnings and subsequent price drops at Caterpillar Tractor and IBM (which makes up 6 percent of the Dow Jones industrial average) as instructional.

``Those two reports are warnings to people. Do you really want to tie yourself to economically dependent stocks or do you want issues with a dependable earnings outlook?'' posits Mr. Connolly, chairman of the Dean Witter Reynolds investment policy committee.

Belief in the slow-growth scenario also bolsters the case for another discount rate cut. That expectation, coupled with heavy buying by Japanese investors, sent bond prices higher last week. After getting off on the wrong foot, the stocks tagged along. The Dow industrials closed at 1,832.26 Friday, down 4.78 points in five trading sessions.

Connolly notes that cash is piling up in portfolios to levels often seen just before a bull run. Institutions' cash is running at 7.2 percent of their assets. Mutual funds are at 10 percent, the highest in a year. And cash continues to accumulate in brokerage house money market accounts, even though average returns have skidded to 5.2 percent. He says cash could continue to build, but its ``ultimately ammunition for . . . both bonds and stocks.''

Insider buying also portends a market rally, according to the Fort Lauderdale-based Institute for Econometric Research. Its ``Flash Index'' shows corporate officers buying their own stock at rates not seen since September of 1985, when the Dow started a 600-point climb. Similar readings preceded rallies in 1984 and '82.

What might ignite such a rally? ``The actions of the Fed and the election results are the most important short- term events,'' says Connolly. On Nov. 4 the Federal Reserve's Open Market Committee meets and may decide to loosen credit. The same day, congressional elections will be held, and control of the Senate could go to the Democrats.

In any case, neither event is likely to change the advice proffered by Steven Einhorn, market strategist at Goldman, Sachs & Co. He also adheres to the play in large-capitalization, consumer growth stocks. Mr. Einhorn notes that when theses stocks fell from favor a month or two ago, their prices dropped 15 to 20 percent. Or as Mr. Greenwald at Sanford C. Bernstein puts it, ``They got slam-dunked.'' Whatever. ``They're now fairly cheap,'' says Einhorn.

And Salomon Brothers Inc., another major institutional broker, adds its weight to the legion of consumer stock proponents.

``Signals from the economy don't seem to support the recent move into cyclical stocks,'' Robert S. Salomon Jr. wrote in a recent investment strategy report. ``Against a backdrop of slow growth, subdued inflation, and lower rates, we continue to recommend a defensive investment strategy.'' The report recommends overweighting portfolios with consumer staples and financials.

Salomon expects better earnings in 1987 for such companies as Digital Equipment Corporation, Mentor Graphics, Hewlett-Packard, and Motorola.

It should be noted that Goldman, Sachs hasn't totally given up on cyclicals, either. Its twist: ``soft cyclicals.'' ``The papers, chemicals, rails, airlines, and some technology stocks are capable of growing earnings momentum in a slow economy.''

In short, the Wall Street equivalents of Bird and Payton are off the bench.

Einhorn predicts: ``These two sectors [consumer growth and soft cyclical investment] will lead us to higher highs in the next six to nine months.''