Now what? Investment gurus suggest refuge in cash and bonds

What a difference a couple of weeks - or days - can make. Cries of ``cash is king'' can be heard among the buy and sell orders in the world's stock exchanges, while the bond market, which recently experienced its highest yields since December 1985, may become the biggest benefactor of the stock market's plummet. Activity in the stock markets Friday and Monday had erased all of 1987's 826-point gain. From an August high of 2,722.42, to midday yesterday, the Dow Jones industrial average had fallen to 1,825.26 points.

Monday, the Dow fell a record 508 points to 1,738.74, a one-day decline of 22.6 percent, and a $503 billion loss in stock value. Trading on Monday nearly doubled from Friday's record volume, to 604.3 million shares.

``We have always kept our clients 100 percent invested in stocks, and not in cash,'' notes Gerard Carret, chief financial officer of Carret & Co., New York. ``But lately, with buyouts and mergers, we have built up cash in some accounts up to 25 percent. We've been putting money in money market funds or bonds.'' Most of the accounts the company manages also have some precious metals, which hedge against inflation and falling stock prices.

Assets in gold mutual funds have grown this year, says Reg Green, editor of the Mutual Fund News Service in San Francisco. ``In times like this, money goes into gold.''

Mr. Carret says stocks are clearly in a bear market. ``The overall trend is down. High-grade bonds will look more attractive, while junk bonds will look more risky,'' he notes.

``For conservative investors, we're still saying it's not too late to go to cash,'' adds Eugene Peroni, director of technical research at Janney Montgomery Scott Inc. in Philadelphia. ``Invest in fixed-income instruments and anything that's liquid. Even tax-free [money market] funds approaching 5 percent interest are attractive.''

On Monday, Drexel Burnham Lambert Inc. advised its clients to put their money in the bond market. ``Bonds have stabilized,'' explains Abby Joseph Cohen, first vice-president of investment policy analysis at Drexel. ``We are encouraging our clients to stay in the markets.''

Ms. Cohen says the stock market's fundamentals are still quite good. ``We are a long way from recession,'' she says. ``Corporate profits still look good, and 1988 earnings should be better than 1987. On the current price-earnings basis, the market looks cheap.''

For the investors who choose to stay in stocks, some analysts suggest cyclical stocks, such as steel, chemicals, and the smokestack industries. Consumer-oriented stocks, such as financial services and retail, may not turn around as quickly. ``The repercussions of the fall are great,'' observes one broker in Chicago who asked not to be identified.

``We're moving into Christmas, which was already expected to be weak. Now with the market's fall, people will perceive they don't have as much money, and stores won't hire as many people or carry big inventories. The whole process backs up the pipeline,'' he says.

Despite the spill some stocks took, they are still attractive, Cohen says.

``A lot of the large, liquid stocks seem to have gotten hit hard,'' she says, listing General Motors, Ralston, IBM, Digital, and Dow among the technology, consumer, and chemical stocks to follow. ``But the fundamentals haven't been hit.''

Thomson McKinnon's St. Louis office had a meeting Saturday with 90 brokers from the Midwest.

``For those clients who are conservative, who are investing in the market for extra income, we're working to keep them involved and hold their hands,'' says Jack Demaree, vice-president and branch manager. ``For the last 35 years, stocks have been good investments. Investments should always be for extra money. The people who have been greedy will have to start again,'' he says, adding that the investors who will be most hurt are those who borrowed on margin.

For those who look to history as a guide, the stock market's performance is not following history, any newsletter writer's predictions, or any analyst's observations. ``No individual stock or index right now is recognizing any technical support areas or any market level that is sustainable,'' says Mr. Peroni. ``We're in a free fall. Monday's performance does exceed Black Tuesday [Oct. 28, 1929] by a long shot.''

The market's fall brought comparisons to the Great Crash of 1929, and the end of the five-year-old bull market was proclaimed. In the aftermath of the market's fall, Chemical Bank and Marine Midland Bank yesterday lowered their prime rates back to 9 percent, after raising it last week half a percentage point.

``Monday was a devastating day,'' says Larry Wachtel, a market analyst at Prudential-Bache Securities, New York. ``Many people will get out of the market and try to find a point of stability, where panic and emotion disappear. We may be there now.''

Mr. Wachtel says he expects that the next two months will be quiet. ``There will be some investment, but we'll float along. It has to convalesce. The statistics are there about the Great Crash, but the only thing that's similar is the crash in the foreign markets. I think it's foolhardy and flip to jump to those comparisons.''

Although Monday's loss of 22.6 percent was greater than the 12.8 percent drop that led up to the Great Crash, measures have been taken to try to protect investors. For one thing, the Securities and Exchange Commission was created in 1934. Another difference is the margin requirements that investors must follow. In 1929 investors had to put down only 10 percent to buy stock. Today margin requirements are 50 percent.

The market's rapid drop and volatile swings during the past two weeks have caused much disarray. Some stocks started trading late on Monday because of a backlog of sell orders. Foreign exchanges suspended trading yesterday. And managers have had a hard time keeping tabs on how much they manage.

``A couple of weeks ago we managed $275 million in assets,'' says Carret. ``Monday we saw a panic - there's no other word for it.'' Carret invests mainly in small- to medium-size capitalization stocks, because they have done relatively better than the big stocks, he says. ``It's too late to sell and too soon to buy. We're just going to not panic. This is not the end.''

John Carey, who manages the Pioneer Fund in Boston, says the $1.5 billion fund was invested fully in common stocks, which historically have given the best return over the long run, although they are volatile.

``We're not traders. We've been buying stocks over the last six to eight months that are fairly conservative,'' he says. His purchases include utilities, stocks in banks without foreign debt, and consumer goods, such as food and publishing. The fund had avoided higher-multiple stocks, such as technologies and news issues.

The market will go to an excess on the downside, says the broker from Chicago, just as it did on the upside. ``It will have to correct itself, and the market will find an intrinsic value in securities again. I'd say the market is probably near the correction point, and it should retrace about half of what it lost. This market is taking stock out of weak hands and putting it into strong hands.''