The prospects for the stock and bond markets are as uncertain for the rest of the year as they were upbeat a year ago.
"I don't think one can have terribly strong convictions today on the outlook for the financial markets over the next three months," said Edward Yardeni, director of economics at Prudential-Bache Securities Inc. "That being the case, a very cautious attitude in the markets is advisable."
But while crystal ball gazers advise caution, Wall Street's growing marketing and new-product peddlers are coming up with more and more gadgets to appeal to investors uncertain about specific stocks or bonds.
In the past 18 months, there has been a proliferation of so-called derivative products: Futures on indexes; options on index futures; options on various broad and narrow indexes.
Spurred by the popularity of the first major product--options contracts on the Chicago Board of Options Exchange--competitors have been busy. The latest innovations are the American Stock Exchange's options on an index of 30 oil and gas stocks, and the New York Stock Exchange's options on its composite index of 1,500 stocks, both of which begin trading next week.
All this is happening while the bulls are biding their time. When the bull market was still in its early stages last fall, it was difficult to find investment experts who were anything other than sanguine about Wall Street's prospects.
Today, however, with the slowing of the record-breaking performance of the bull market that saw the Dow Jones Industrial Average climb by almost 61 percent over 10 months,only selective and astute investments are likely to match the profits of the 1982-1983 period.
"It's unlikely we'll find screaming buys in the marketplace," Yardeni said. "The volatility in the stock market will continue and the bond market will basically follow the trend set by the federal funds rate."
But, if the uncertainties on the national economic horizon over corporate profit performance and interest rates are favorably resolved, some Wall Street prognosticators think the market could resume sharp gains before the end of the year.
"The first leg of the bull market is over," said Lee H. Idelman, senior vice president and director of research at Dean Witter Reynolds Inc. "Now we have to count on earnings to give us another leg."
If the generally expected strong third-quarter corporate earnings do materialize, and if interest rates move little in the short run, what Willian M. LeFevre, vice president-investment strategy at Purcell, Graham & Co. calls a "new wave on the upside" could come to pass.
"If people are less concerned about the prospects of higher rates and the fourth quarter is stupendous" the Dow Jones Industrial Average, which closed Friday at 1,225.71, could rise to above the 1,300 mark by the end of the year, and as high as 1,400 to 1,500 by Election Day 1984, LeFevre said.
But the continuing problems for the credit market posed by large federal deficits and the likelihood that election year politics will effectively bar serious action to solve that problem, combined with what some experts see as a sagging recovery and the beginnings of a new spiral of inflation, make such predictions generally minority views.
LeFevre is anything but convinced of his optimistic scenario and suggests that average investors hold plenty of cash and buy high-yielding utility stocks, for instance, that offer solid dividends.
Yardeni, similarly, suggests investors stay liquid in some type of money fund and says there are good investment opportunities with bonds in the 11-to-12 percent range, if investors are willing to hold on to these longer-term offerings until their maturity.
For investors willing to add some risk to their holdings, many experts are looking to so-called business cycle stocks, like oil and steel companies, which inevitably benefit from economic upturns. And there are always the sagging oversold high-technology stocks for investors who can catch companies like Texas Instruments as they hit bottom on the market charts.
But bulls and bears matter little to the devotees of indexed options and other investment gadgets. Nor are they concerned whether the market is volatile or flat. "Options on the NYSE index are an investment for all seasons," commented Frank J. Jones, who will head the options operations.
To small investors, these inventions can be as confusing as the variations on Pac-Man. To sophisticated investors--of whom the vast majority are public businesses and professional speculators--they offer just that many more ways to hit the jackpot.
Unlike video games, however, these contests are played with real money; $350 million in cash was invested in 10 such instruments during the first week of September, according to the Wall Street Journal.
And, like proliferating video games, only a few are expected to become popular.
These products, which came about in part as a result of the volatility of the underlying markets and in part because government regulators have not quite figured out how to watch them, claim to offer the investor the opportunity of playing the entire market with a single bet, and without the necessity of trying to pick individual stocks or groups of stocks. Moreover, as the leverage is very high--10 percent or less down--there is the potential for much higher profits--or losses--than on stocks and bonds.
In theory, these products should act to decrease volatility in the markets and increase activity, according to Howard Brenner, executive vice president of Drexel Burnham Lambert. As for the effect on investors, Brenner said they will provide protection against losses during a broad-based market correction.
But Brenner said it is too early to tell whether they will provide protection in a rolling correction, one which occurs sector-by-sector, such as the market is now undergoing.
Investment advisers, such as Washington financial planner Alexandra Armstrong, suggest investors who are confused about market trends look closely at trading volume when they make key decisions this fall. A higher buying volume generally indicates a rising demand for stocks, which makes prices rise as well, Armstrong pointed out.
Volume on the New York Stock Exchange has generally been tapering off since June, a trend indicating that stocks are declining in price.
"When the market goes down on bad news--such as higher unemployment--but doesn't rise after a good report--such as increased sales figures--a peak has probably been reached," she said.
Armstrong, who thinks the bull market will continue for another year, advises customers to use stop-loss orders if a stock's price declines over 15 percent. In more general terms, she urges diversification.
Some experts recommend that investors hunting for safety during this uncertain period look to mutual funds, which may offer the best way for the small investor--one with under $25,000--to stay in the market.
Burke Walker, assistant vice president of T. Rowe Price, reports that at the end of August customers withdrew about $60 million from its aggressive growth stock fund (which invests in new and high-tech companies) and long-term bond funds, and put a like amount into money market funds. Walker said those moves indicate that they thought the market had peaked and that short-term interest rates were on the upswing.
Even though money market fund yields are roughly the same as a year ago, 9 percent, the real rate of return is higher now due to lower inflation.
There has also been a marked switch at T. Rowe Price toward mutual funds that invest in natural resources, energy, petroleum, precious metals and timbers, areas in which some specialists believe the next upswing will occur.
Growth in equity funds peaked in early summer, according to the Investment Company Institute. Al Johnson, the trade group's chief economist, sees no significant switch back to money market funds because he believes a small uptick in interest rates is not enough to lure people back. On the contrary, with inflation down, people are assuming some risk by sticking with equities.
Larry Williams of Kalispell, Mont., who wrote the best seller "How to Prosper in the Coming Years" by predicting the market boom, believes the financial markets will reach a new low in mid-October before turning up.
According to Williams, a successful commodities trader, hogs and pork bellies will make strong moves at that point. In his view, the bull market for grains is over and there will be no major move during the fourth quarter in gold and silver prices.