WASHINGTON - Some bears are morphing into bulls.
Prominent among them is Robert Lee Harrell, president and chief executive officer of an eponymous Austin, Texas-based money management firm, whose tactical asset allocation model raised the exposure for equities from 30% - the minimum allowable - to 100%, or whatever is the maximum permitted by clients, on April 27. The model had lowered the equity exposure to 30% on Jan. 14, 2000.
Other converted bears include James Slack, president of InvesTech Research, a Whitefish, Mont.-based investment research and money management firm; Donald G. Coxe, chairman and chief strategist of Harris Investment Management Inc., Chicago; and Tracy Herrick, chief investment strategist and economist at Jeffries & Co., Palo Alto, Calif.
InvesTech, for example, has allocated 70% to stocks now - its highest allocation to equities in five years - from 90% in cash until recently.
Several attribute their newfound optimism to the Federal Reserve Board's cuts in short-term interest rates, particularly the surprise cut April 18. Others believe the speculative bubble of technology stocks has burst and stocks are not as overpriced as they were last year.
Robert Harrell Inc.'s mathematical model examines the risk premium for stocks compared with 90-day Treasury bills. The dropoff in short-term interest rates prompted the model to re-enter the market. The firm's TAA strategy - about $120 million of the firm's $2 billion under management - returned 7% last year, compared with -9.1% for the Standard & Poor's 500 stock index.
Harris Investment's Mr. Coxe noted that key foreign currencies rose relative to the U.S. dollar after the central bank's recent rate cut. That's important, he said, because the world was hovering on the edge of a global synchronized recession, and the Fed's action set the stage for an expansion of global liquidity.
Moreover, Mr. Coxe said, the yield curve has steepened, meaning the spread between 90-day T-bills and 10-year Treasury bonds has widened - to 153 basis points on April 20 from -19 basis points Jan. 5 - suggesting investors are betting the economy will strengthen.
"What this is saying is the global economy will be a lot stronger six months from now than today," he said.
Meanwhile, Hugh Johnson, chairman and president of First Albany Asset Management in Albany, N.Y., who says his sentiment was "very black" in December, has become "very bullish" since February or March. On April 20, he raised his allocation to stocks to 58% from 52% for an institutional client that can't hold less than 35% or more than 65% in equities.
And, Jeremy J. Siegel, a finance professor at the Wharton School of the University of Pennsylvania who forewarned of the carnage in technology stocks that started last year, would recommend allocating 70% of a portfolio to stocks now, up 10 percentage points from a year ago. But he would still steer clear of technology stocks.
Over the long-term, investors can expect returns of 7% to 10% a year from stocks, he said.
Jeffries' Mr. Herrick, who would invest 50% of a hypothetical portfolio in stocks now, compared with only 30% six months ago, said the Fed has been pumping up money supply substantially by lowering short-term interest rates, and that "has been a very powerful stimulus for the stock market." He expects the Fed will cut short-term rates by a quarter percentage point at both its May 15 and June 26 meetings. He warns he would peel back on equities when the Fed stops cutting short-term rates, because he believes the growth in money supply is the only thing propping up the market.
One of the key reasons for Mr. Slack's change in sentiment was the Fed's fourth rate cut earlier this month. On only 10 previous occasions has the Fed made four consecutive cuts in short-term rates, and all but one sparked a rally in the stock market, he said. Moreover, a number of stocks outside of technology are trading at or below their historical price-earnings ratios.
Mr. Johnson said he became bullish several weeks ago, because the conditions that presage the end of a bear market fell into place.
He cited the steepening of the yield curve, and the performance of consumer cyclical stocks as two of the factors in his change of heart. Consumer cyclicals tend to do well when the economy is strengthening. "Investors are sending a signal (that) although things are gloomy now, things will get better in the fourth quarter of this year," he said.
Then there are others like John P. Waterman, chief investment officer at Rittenhouse Financial Services Inc., Radnor, Pa., who made the decision only three weeks ago to lift the equity exposure to 70% over the next several months from 60%. Mr. Waterman said that despite the stream of bad news about the economy, there are enough bright spots to convince him the downturn will be shallower than earlier anticipated and the stock market will bounce back by the end of the year.
Still, several investment strategists and economists remain resolutely bearish.
Robert J. Shiller, an economist at Yale University and author of last year's best-selling book, "Irrational Exuberance," has only 10% of his own personal portfolio in stocks, with the rest in real estate, bonds and money market funds. Mr. Shiller, who maintains the market is still too high, predicts it could be many years before the market makes a comeback.
Jeremy Grantham, investment strategist at Grantham, Mayo, Van Otterloo in Boston, concurs. He believes the stock market is still 40% overvalued and while its drop might be punctuated by periodic rallies, it will continue to descend until it returns to the trend line.
Part of the problem, Mr. Grantham said, is there were two bubbles - the technology bubble superimposed on top of a broad market bubble. While the technology bubble has blown away, the broad market bubble still remains, he said.
Mr. Grantham would get out of developed country stocks to the extent possible, but would invest in small-cap value stocks, emerging markets stocks and real estate investment trusts.
"We are likely to remain bearish on U.S. blue chips for a number of years," he predicts.
Gary Shilling, who heads an eponymous economic consulting firm in Springfield, N.J., also predicts the carnage in stocks is not over.
Mr. Shilling believes the Nasdaq stock market could fall to 1000 from 2059.80 on April 25; the Dow Jones industrial average could sink to 7,000 from its close of 10,625.20 on April 25; and the S&P 500 could decline to 800 from 1,228.75 that day. "The bottom is still a fairly good distance from here," he warned.
Mr. Shilling has about 20% allocated to stocks, 60% to bonds and 20% to cash and has had this allocation for more than six months.