Staying Warm in a Frosty Stock Market

There may be balmy breezes blowing outside your window now, but weather-watchers know the crisp winds of winter lie in wait.

For millions of folks, it's time to think about winterizing the house - caulking the windows, checking the insulation in the attic.

Investors, take notice! Harsh winds on Wall Street have already put a chill in millions of portfolios, and a growing number of forecasters see frosty times ahead for the stock market.

Even with last week's mega-rally in stocks, it may be time to winterize your investment strategy.

Despite those rallies, the Dow Jones Industrial Average is sharply off its high of 9338 points on July 17 (see chart, Page 10).

Some analysts already call the current decline the first stage of a bear market - a period when stock markets tumble more than 20 percent in value and share prices steadily erode.

The market could still surprise the pessimists, as it often does, and saddle up another run for higher ground, but for the first time in years, even some former optimists sound cautious.

Cleaning house

Stock expert Muriel Siebert, for example, recently scoured her personal portfolio and advises the same for other investors.

She scrubbed out stocks tied to financial turmoil abroad, especially in Russia, Latin America, and Asia. Ms. Siebert, who heads investment firm Muriel Siebert & Co., also put the pinch on companies with a weak outlook for earnings.

She recommends tossing out marginal mutual funds or stocks. Focus on the strong performers.

And focus on a plan.

"You need to be asking yourself, 'What's your money for, and how soon will you need it?' ." says Chuck Kadlec, managing director and chief investment strategist for investment firm J&W Seligman & Co., New York.

"You need a plan and a strategy to implement that plan. People should not be trying to wing" this market, Mr. Kadlec says.

He calls himself "cautiously optimistic" that stocks will soon rise. The Federal Reserve, he says, looks ready to cut interest rates. (See "Economic Scene," page 14). That should help the stocks.

But he's also slightly wary.

"Bull markets never die of old age," he says, they succumb to "policy mistakes."

The bulls can still be heard, of course. Abby Joseph Cohen, respected market strategist for Goldman, Sachs & Co. of New York, says the market still straddles strong fundamentals - primarily a buoyant US economy.

She sees the Dow at 9300 by January and recommends that investors use the current dip in the market to increase ownership of stocks or stock mutual funds.

Al Goldman, market strategist for A.G. Edwards & Sons, St. Louis, shares her enthusiasm and sees the Dow rising back around 9000 by January.

Ms. Cohen and Mr. Goldman have impressive track records in calling the market, but contrary views are becoming louder, more common, and more acceptable.

Dick McCabe, chief market technician for Merrill Lynch & Co., says the Dow might retest its bottom near 7400, then rise to between 8000 and 8500 this year.

"But even part of 1999 could be weak," he says. "It may take until spring or the second half to start a new bull market cycle."

Not a shy bear

Geraldine Weiss shows no hesitation about bashing the bull.

"We're heading into a bear market," a Dow around 5000, says the publisher and editor of Investment Quality Trends, published in La Jolla, Calif.

She notes that while the Dow has lost close to 15 percent from the July 17 high, most stocks on the New York Stock Exchange have lost more than 20 percent of their value.

And most stock mutual funds have lost their 1998 gains and are now eating into 1997 profits.

That's why market experts suggest that you think defensively,; put up the storm shutters:

* Make certain you have an investment plan.

* Rebalance your mix of stocks, bonds, and cash to meet current and future goals.

* Trim holdings likely to suffer from market weakness, such as overseas currency turmoil.

* If you want to make your portfolio more cautious, increase the percentage of cash (money market mutual funds) or bonds and bond funds. Reduce your exposure to stocks by selling when the market rallies.

Goals are key

Know your goals. If you have 25 years before you will need the money, you can afford to ride out the current storm.

But if you need the money in the next few years, shift into a money market account or bonds, says James Stack, who publishes InvesTech, a newsletter, in Whitefish, Mt.

"Don't underestimate the present risk," he adds, even if interest rates come down.

Kadlec urges investors to neither panic or become "heroic." Don't commit a huge chunk of new money to a stock or fund, and don't yank all your dollars out of the market.

"Use dollar-cost averaging for new investments, putting a little in the market on a regular basis over time." You'll own more shares for less money, with better protection against new losses.

Kadlec likes technology stocks and funds, since the sector continues to expand.

He also likes the stocks of smaller companies, what Wall Street calls the "small caps" stocks ("They're beaten down.") plus carefully picked high-yield corporate bonds.

"Come home to safety," says Don Ross, strategist at National City Investment Management Co. in Cleveland. He sees the market falling further, and ending the year well below its July high.

Mr. Ross recommends Treasury bonds, municipal bonds and - though they may take patience - selected small caps.

"Do not risk more than you can afford to lose," he cautions.

Mr. McCabe of Merrill Lynch looks for stocks that tend to do well even in down markets - electric utilities and food chains, for example. Energy stocks have also been pummeled, he says, so many now look attractive.