Interest rates are up. Most stocks, particularly the old reliable blue chip stocks, are down. Decisions about where to invest savings seem to be more complicated than ever.
That may be because the U.S. is entering its “third economy,” says Alan Leach, president of BancorpSouth Investment Services Inc. in Jackson. First there was the agricultural economy, and then the manufacturing economy. Now we have the technology economy.
Leach says the dynamics are very different with the technology economy. For example, “scalability” is much more significant. Scalability refers to the ability to increase the customer base very quickly. Someone selling software over the Internet can — if the product is in demand — scale up from selling hundreds daily to thousands in a short period of time with minimal need for more hardware investments.
Contrast that to manufacturing. Scaling up from 100 refrigerators per week to a 1,000 takes time, labor, equipment and space.
“Manufacturing is scalable, but not quickly,” Leach said. “Technology companies don’t have the restrictions of hardware and personnel to the extent experienced by manufacturing businesses. By selling something on the Internet, I can go from startup to hundreds of orders per day very quickly, and the business is global. I can sell software to someone in Germany, shoot it to them over a fiber optic connection in a matter of seconds, and it doesn’t really cost me anything but the cost of telephone line. Distribution of products through the Internet is very, very inexpensive.”
That means that there is the potential for virtually unlimited profitability once a product is developed if there is demand in the marketplace. Leach said that is why so many people are enthusiastic about technology stocks and dot com companies.
“Everything out there isn’t going to be a winner,” Leach said. “But if you get a winner, the potential for profits is well beyond those of companies which are delivering hard goods simply because the cost of distribution is so low.”
Not all of these companies will end up with a product with widespread sales potential. It is a rapidly changing landscape, one that Leach believes makes it necessary for most investors to consult with a full-time, professional advisor.
“There is a tremendous volume of information out there,” Leach said. “No one can absorb all of it. But we work as hard as can to keep up with it. We recommend getting a professional to assist with investments, and it is our contention the professional is more than worth the cost of their services.”
The Dow Jones Industrial average is off almost 2,000 points recently after trading at close to 12,000. Over the past year the Dow Jones has seen an increase of about 7.4%. Compare that the technology-heavy NASDAQ, which is up 119% in the past year.
“Look at the Dow, the traditional measure of our economy, as opposed to the NASDAQ, the measure of the new technology economy,” Leach said. “The difference is amazing.”
Jon E. Anderson, senior vice president and senior trust officer, Trustmark National Bank, agrees that 1999 was an unusual year.
“We have never had a market move like 1999 with so much of the market being down and so little up,” Anderson said. “It has created a very difficult market to invest in if you are trying to have broad-base stock exposure. What you have seen is a real explosion on NASDAQ. But while you may have a stock that doubles in value, in the same sector you may have 90% of the stocks losing value. Not only are advisors working with customers having to be more attentive to right sectors, but they also have to choose the right stock selection in that sector.”
In the past year the stock market has rewarded a few people dramatically, yet a large number of customers have not benefitted from the market increase because it has been so narrowly defined.
“A lot of companies that have long and strong histories of stability and paying good dividends didn’t do well in 1999,” he said. “A lot of the best returns in market went to companies with low and no earnings. Many don’t even have PE (price/earnings) ratios because they don’t have earnings. But a lot of those companies did exceptionally well last year because customers believe those companies will pay them back in two or three years when they start making money.”
Anderson said it is worthy of note that only seven stocks (Microsoft, Cisco, GE, Wal- Mart, Oracle, Nortel, and Qualcomm) contributed 50% of the performance in the S&P 500. Only 30 stocks accounted for 100% performance. On the New York Stock Exchange, 69% of companies listed lost market value in 1999.
Stocks with the highest S&P quality ratings had the worst performance in 1999; stocks with the lowest S&P quality rating had the best returns.
“We have never had that before,” Anderson said. “It has made it much more difficult for investors who believe in quality companies with good returns. Last year was not a good year for them. As a result, some people have pulled money out of the market and gone into fixed-income investments. On the other side, since quality companies have lost value, would it be a wise idea to buy into those companies now?”
Jill Beneke, AmSouth Bank Corp.’s senior vice president and manager of the investment and trust division for Mississippi, said customers are surprised and perplexed about the performance of blue chip stocks.
“I think that people are stepping back and assessing what those indicators really mean,” Beneke said. “Is that a long-term trend we will see perpetuate itself, or is it something short term? There are a lot of different theories about what is happening in the stock market, and questions about investments in companies with no earning or assets. We’re seeing a huge amount of money invested there, and that is where the stock market is really growing. I think people are cautiously evaluating whether that is a permanent market shift and a permanent trend as opposed to a blip in the economic cycle.”
The increasing interest rate environment and how it will impact the stock market is of concern. On the flip side, the higher interest rates may be more appealing than stocks to customers who prefer low-risk investments. Right now because of indications that the Federal Reserve will increase rates again in the near future, customers may want to keep savings short- term, 60 days to two years, because there isn’t much greater return for longer terms. Right now short-term rates are as high or higher than long-term rates.
Beneke said higher interest rates have led to many customers shifting their asset allocation from being so heavily invested the equities market to more bond influence in the portfolio.
“In our models we have been gradually shifting as we watch what the economy is doing and what interest rates are doing,” Beneke said. “In general for the bond market to rally again the economy would have to slow a good bit more. There are still parts of the equity market that are extremely robust. For long-term returns, the equities market is still in favor with the huge majority of our customers.”
Contact MBJ staff writer Becky Gillette at firstname.lastname@example.org or (228) 872-3457.