Business News & TipsAlan S. Moore / L’Observateur / November 11, 1998Stock prices are stabilizing from their sharp decline and intense volatility. The combination of a willingness by the Federal Reserve toreduce interest rates along with progress on addressing Japan’s banking problems have given investors confidence that an end is in sight from the vicious cross-currents that have gripped financial markets. The questionnow is whether the recovery in prices is a correction of oversold stocks or the start of yet another climb to new highs.
We favor the former, as the underlying fundamentals in the economy’s slowing growth and corporate earnings don’t, in our opinion, support the record valuations that new highs would imply. While we fully expect somestocks to reach new highs in the year ahead, we believe this is unlikely to occur until better earnings visibility emerges.
Tax-loss selling is a regular feature of year-end financial markets. Thedifference in tax rates for long- and short-term holding periods is very significant and too compelling for some investors to ignore strategies that minimize their taxes. On the flip side there are the inveterate bargainhunters who sift through various stock screens in an attempt to identify those issues that are prime candidates to bounce higher when the selling pressure abates.
This year’s pickings appear greater than usual given the huge divergence in performance between large- and small-cap stocks causing heightened pressure on the small-cap stocks. If our belief is correct that small-capstocks are likely to outperform large-cap stocks over the next year, the current selling pressure would seem to represent a made-to-order opportunity.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc. andSIPC.)
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