Money managers expect moderate growth in the U.S. economy and its stocks, though some are concerned that continuing rapid domestic economic expansion could touch off a market plunge this year.
Generally, money managers think economists are correct in expecting healthy but decelerating domestic economic expansion for 1994. Yet some money managers caution that they are keeping their financial running shoes nearby for those portfolios they can alter.
Nevertheless, they are listening to the consensus economic view and noting the increasing evidence of a solid recovery, and this is reflected in their portfolios.
On average, they are overweighted in the financial sector, 16% vs. 11% for the Standard & Poor's 500 Stock Index; overweighted in the technology sector, 11.2% vs. 9% for the S&P 500; overweighted in capital goods/construction sector, 8.1% vs. 8% for the S&P; and underweighted in consumer staples sector, 16.4% vs. 20.4% for the S&P, said Bill Kennedy, president of W.T. Kennedy & Associates, an Atlanta pension consulting firm.
The weightings "support the theory that the money managers have moved money in relation to the economy and they are into cyclical stocks," said Mr. Kennedy, who follows 1,267 equity portfolios with $371 billion.
The Crabbe Huson Group, Portland, Ore., was heavily into cyclical stocks in 1993, said Richard S. Huson, chief investment officer. The firm is now a "little more eclectic," though cyclical stocks remain the firm's greatest portfolio emphasis.
Mr. Huson thinks the S&P 500 will return less than 11% in 1994. "We are not going to have the strong dynamics of the cash flow environment of '93, but (1994) is not going to be a negative environment - just not as good as 1993," said Mr. Huson.
Though The Crabbe Huson Group holds stocks like Ingersoll Rand Co. and USX - U.S. Steel Group it has sold its auto stocks and trimmed back its USX holdings. In the last few months it also has doubled the cash in its mutual fund equity portfolio and in portfolios where the firm has the ability to establish an asset mix.
Frontier Capital Management probably has more of a cyclical exposure than a year ago, said J. David Wimberly, chief investment officer for the Boston firm. He said his firm likes the auto, manufacturing, technology and some of the machinery stocks.
"We think that the U.S. has become the world's low cost producer in a lot of areas, and particularly in the manufacturing sector our labor costs are less, our plants in some cases are just as efficient or more efficient," said Mr. Wimberly. He said the United States remains a large market that will benefit from the North American Free Trade Agreement, the beginning of the economic recovery in and new markets in Southeast Asia and Latin America.
Money managers investing in U.S. stocks continue to position themselves for "continuing bull market growth," said Ron Peyton, president of the San Francisco-based consulting firm Callan Associates. Callan's 250 pension clients contract with more than 500 money managers.
However, the money managers are "ready to change on a moment's notice," said Mr. Peyton. The consensus opinion of pension funds, endowments and foundations is that the real return for the U.S. market will be up slightly in 1994 because of a lowered estimate for inflation to 3.5% from 4%, said Mr. Peyton.
The inflation issue is "critical," said Mr. Peyton.
But the state of the economy also plays a paramount role.
"I think if there is any (market) risk, it's that maybe the economy gets a little too strong," said Mr. Wimberly.
The potential market dive that managers hope won't come could begin with faster-than-expected economic expansion and the Federal Reserve Board tightening up on interest rates. The tightening, coupled with a stock market correction, they suspect, could send thousands of neophyte and jittery investors out of mutual funds, where many first-timers put their money after removing it from certificates of deposit.
Stock and bond mutual funds took in more than $100 billion in the first 10 months of 1993.
The current flow of assets into the stock market "is the most critical thing, and everyone focuses on interest rates to tell us when that is going to be over. It (the flow) is already starting to diminish," said Mr. Huson.
Yet the United States is coming off an economic hot streak. Economists expected the economic growth rate to reach 4% to 5% in the fourth quarter of 1993. The Commerce Department's index of leading indicators has gone up four months in a row. Sales of previously owned homes hit record levels last November.
However, some money managers and economists expect the federal government's continuing push on deficit reduction and health-care reform to keep inflation at less than 3% and forestall a recession in 1994.
Alan L. Lewis, chief investment officer at Analytic Investment Management Inc., Irvine, Calif., says he thinks the opinions for moderate growth in 1994 are good estimates. However, Mr. Lewis adds that those guesses aren't "necessarily accurate. Usually what happens is that people miss the turning points - usually (the estimates are a) projection of what has been going on in the recent past."
Some economists outside the consensus think the economy will grow faster than expected because of anticipated continuing low oil prices and stronger than expected consumer and business spending.
If the Fed tightens interest rate, "people might not be as quick to get out of CDs," said Mr. Huson.
Some managers also have been anticipating a market correction, which could be as deep a plunge as 15% because "everyone is thinking 10%," said Mr. Huson.
"I think the bears feel that many of those people who have never had anything other than CDs and money market funds are not going to take kindly to an 8%, 10% or 12% decline (in the stock market), and they may be frightened out of the market," said Derwood Chase, chief investment officer of Chase Investment Counsel Corp., Charlottesville, Va.
"I think we are finally going to get that intermediate term 10% to 12% correction this year that we didn't get last year or the year before," said Mr. Chase. He added that depending on how the correction "evolves it could be the beginning of the end, or it could be just that, an intermediate term correction."
"I don't think we have quite enough information to say that the bull market is over, but it certainly getting tired and strained."