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Monday, Dec 4, 2023


Don’t look now, but the Standard & Poor’s 500 was up 31.6 percent for the year, as of last week.

Given some of the bumpiness of late, it may be hard to believe, but with a minor December rally, the S & P; 500 could even beat 1995, a banner year still fondly recalled by money managers.

The S & P; 500 was up 34.1 percent in 1995, followed by 20.3 percent in 1996.

The typical investor in blue chips has well more than doubled his wad since year-end 1994.

Lagging for the last few years have been small-cap stocks, as indicated by the Nasdaq Industrials composite, which as of last week was up only 12.7 percent for the year, after climbing 15 percent in 1996, and 26.6 percent in 1995.

But what about 1998? Will the blue-chip juggernaut continue to crush small caps and growth stocks under its wheels? Not too surprisingly, several local players had differing opinions.

Get ready for a reverse, was the conclusion of Robert Bender, founder and chairman of the 25-year-old Robert Bender & Associates Inc., a La Canada-based firm with $150 million under management. His strategy is to buy and hold growth stocks, on a five-to-seven-year horizon.

“My contention is that we have seen the run-up of the S & P; 500 … but you might see a historic year (in 1998) on the Nasdaq Industrials,” says Bender.

The S & P; 500 companies have performed so admirably in the last three years because they have been cutting costs, said Bender. “They are getting bottom-line growth (bigger earnings), without so much top-line growth (sales),” said Bender.

Too, managements have been incentivized by stock bonus plans building profits, not empires, is how chief executives are commonly rewarded today.

But there comes a time when the last worker that can be cut has been cut, says Bender. Further efficiencies are harder to find.

Then, earnings growth for blue-chip companies will depend on real sales growth. “And that’s when we’ll see slower earnings growth on the S & P; 500,” says Bender, who expects this phenomenon to kick in soon.

But Nasdaq stocks are, generally speaking, made up of smaller companies that achieve earnings increases not from cutting costs but by growing sales.

“And next year, the companies that are going to do well are the companies that have unit sales growth,” said Bender. In 1991, when growth stocks really rallied, Bender was up 70 percent. “We may see a year like that again,” he says.

Helping along small caps and growth stocks will be low inflation, and moderate economic growth, says Bender.

The bond market, with feeble yields, and single-digit growth in blue-chip earnings will propel money managers into growth stocks, says Bender.

One little bit of a downer for local business boosters: Bender owns 40 growth stocks, but not one of them is headquartered in Los Angeles County. “They just don’t seem to be based here,” he says.

A different 1998 is foreseen by Joe Di Lillo, chairman of Santa Monica-based Drake Capital Securities Inc., who has liked oil stocks for the last year or so.

Di Lillo’s thesis? World oil demand and supply are very close right now at about 71 million barrels a day and so a jiggle in the wrong direction could send prices up.

Sure, the Organization of Petroleum Exporting Countries raised its official production ceiling last week, sending oil prices and some oil stocks tumbling. But many OPEC nations were already exceeding their quotas, so actual production won’t go up much. Chances are much better for oil prices to go up in the months to come, Di Lillo says. “I think a Saddam, or someone like a Saddam, could send us a geopolitical shock out of left field,” he says.

Di Lillo says stocks are priced in a way that assumes a “beautiful scenario” of low inflation and steady growth. But an oil shock could quickly change that environment to inflationary with slower growth. “I advise investors to be ready to adjust their (growth-oriented) portfolios quickly,” he says, because inflation could be higher and output lower than expected.

By the way, Di Lillo likes a little Los Angeles-based oil stock, Geo Petroleum Inc., which sits atop “heavy oil” reserves in Ventura. This oil can now be better extracted due to new drilling techniques (twin horizontal holes and steam), says Di Lillo.

More sanguine than Di Lillo, but less bullish than Bender, is Patrick Kastein, vice president at Froley Revy Investment Management Co. Inc., the $2 billion-in-assets convertible bond shop in Westwood.

He likes the bond market, due to falling interest rates. Long-term U.S. Treasury bills are selling at 6 percent, but that could drop to 5.5 percent in 1998, says Kastein.

However, even with that fillip, Wall Street is a bit rich, says Kastein.

“We expect some consolidation going forward, for the next six months to a year, to get P/Es back in line,” he says. “Back in line” is probably under 20 times earnings, says Kastein.

Blue chips may be outperformed by small caps, due to the former’s greater reliance on world markets, which look to be weak in 1998 (given the Asian flu), says Kastein.

Kastein concludes that investment grade convertible bonds will be an excellent investment in 1998, for capital appreciation and yield.

And last but not least, Bill Mason, strategist with Woodland Hills-based Cullen Fortier Asset Management Co. Inc., looks for the S & P; 500 to move modestly ahead in 1998, by perhaps 5 percent to 6 percent.

Like all three others interviewed, Mason does not think Fed Chief Alan Greenspan will raise rates in 1998; indeed, with deflation looming as a threat to the world economy, Greenspan may even cut rates, says Mason.

“The pressure will be to cut, not increase,” he says.

Contributing reporter Benjamin Mark Cole writes about the L.A. investment community for the Los Angeles Business Journal.

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