Arrow-right Camera
The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Fund Manager Advises Building Cash Position Weak Earnings, Higher Rates Could Trigger Correction

Grayden Jones Staff writer

Corporate earnings shrink and interest rates rise. Investors watch nervously for signs the bull market has ended.

Those signs preceded the 1987 stock market crash, which erased $500 billion in stock value in one day.

But it could just as well be 1997, which is showing similar hints of weakness, says American Express bond fund manager Ray Goodner. For that reason, he suggests keeping more cash in your investment portfolio as a precaution against a major correction in the stock market.

“It’s early to be alarmed about a correction, but it might be a good time to build a cushion just in case,” Goodner said Thursday at the Pacific Northwest Farm Forum in Spokane. “I suggest holding some cash.”

Goodner manages more than $3 billion for American Express’ IDS Selective Fund and IDS Global Bond Fund. He said he has been closely watching the gap between interest rates and corporate earnings. Securities analysts use that spread to predict volatility in the market.

The gap measures the difference between the corporate earnings-to-price ratio - the inverse of the more widely followed price-to-earnings ratio - and long-term interest rates.

When the spread widens to 6 percent, as it did in 1987, investors may quickly abandon stocks for the more predictable returns from bonds, Goodner said.

Goodner said his barometer was at 2 percent in the third quarter of 1996. But the gap has been growing, he said, and an expected rise in interest rates later this year, if accompanied by a decline in corporate earnings, could push matters into critical territory.

Coupled with growing uneasiness about the almost weekly record highs in the Dow Jones industrial average, the gap may be enough to send many investors to higher ground.

“As interest rates go up, there could be a sell-off of stocks such as 1987,” he said. “There may be more interest in bonds because there’s more cash flow there.”

American Express expects the Federal Reserve to raise interest rates twice in 1997, Goodner said. Corporate operating income growth will be squeezed to 6 percent to 8 percent, down from 10 percent in 1996 and 18 percent in 1995, when productivity gains were highest.

American Express expects stocks in 1997 to show returns in the high single digits, with big company stocks outperforming small ones. Bonds likely will lag behind stock returns, though international bonds purchased through mutual funds may show surprisingly high returns, Goodner said.

, DataTimes