Reversal of fortune

The Dow shatters records, then retreats

Just 24 days after the Dow Jones industrial average reached the much-heralded 10,000 mark, the index reached 11,000 on May 3. The 225.65-point gain that took the index over the top to close at 11,014.69 was the 10th-largest point gain in history.

When black enterprise predicted that the Dow would crack 10,000, we believed that it would reach another plateau-but not with such rapidity. Neither did we and other market observers realize the industrials would have such a sharp reversal weeks later. Fear that the Federal Reserve would hike interest rates caused stocks to drop to their worst levels since the Asian crisis of 1997. In the volatile week before the Memorial Day holiday, the Dow was down 174.61 points and 123.58 points on May 24 and May 25, respectively; then rebounded by 171.07 points; and slid 253.23 points on May 27 to close at 10,455.93. By June 4, the Dow had surged 136.15 points to 10,799.84 due to the favorable May labor report.

Prior to the market rout, the drivers had been those sectors that have been largely overlooked: small caps, financial companies and out-of-favor cyclicals-stocks that rise quickly when the economy is on an upswing and fall when the economy drops. And so-called defensive stocks-tried-and-true companies that hold up in times of market uncertainty-have rebounded with the recovery in Latin America and Asia (see “The Best Defense?” Moneywise, April 1999).

In addition to technology behemoth IBM (NYSE: IBM), the leaders included such mundane industrials as Alcoa (NYSE: AA), Caterpillar (NYSE: CAT) and Dupont (NYSE: DD).

With the recent market activity, investors are more cautious of tech stocks. That fact is evident in the recent performance of the S&P 500 and the tech-heavy Nasdaq composite index. As the Dow made history in May, the S&P 500 rose a mere 19 points to 1355 while the Nasdaq dropped 7 points to 2536. Since April, both indices have seesawed based on weak earnings reports, the latest mergers and the Y2K computer bug scare.

So, for the time being, the value hunters and the bargain hunters are having their day. In fact, the prognostications of such fund managers as Lou Holland, portfolio manager of the Lou Holland Growth Fund and member of the be Investment Roundtable, rang true. Months earlier, he was high on energy when he made sector recommendations that fit his “growth at a price” theory.
Others, among them Mark M. Spradley, a financial advisor in the Bethesda, Maryland, office of Legg Mason Wood Walker Inc., the full-service securities, brokerage and financial services firm, maintain that investors should diversify their holdings to include cyclicals in such areas as retail, real estate and automobile manufacturing. In fact, cyclicals, Spradley says, serve as “one of the best risk-management plays” in such a volatile market. Asserts Spradley: “I fully expect this trend to last for the next three quarters.”

With share prices dropping, says Spradley, this is the time to start building positions for the long term. “You will definitely miss out if you follow the rest of the

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