If investments were like the weather, the current forecast would read something like this:
"Fair skies and balmy temperatures will prevail unless there is a hail storm, tornado or earthquake."
Optimism, it seems, never quite drives out pessimism in the investment world. Wall Street likes to say that even a bull market "climbs a wall of worries."
With all the nation's worries about the economy and the deficit, however, the investment skies appear to be brightening. These are some of the signs:
*An upward sweep in the stock market has carried the 30-stock Dow Jones industrial average up over the 1,400 mark to a new record, some 225 points higher than a year ago and 600 points higher than the start of the bull market in August 1982. While some of the recent DJIA gain is attributed to a sharp rise in one of its component stocks, the long-term market trend clearly has been in a higher direction.
*The bond market, in which prices and rates move in opposite directions, has seen prices strengthen as interest rates continue to edge downward. A 30-year Treasury bond dropped to 10.04 percent last week, and market watchers are looking for even lower rates next year. Signs that the Federal Reserve is sticking to an easier interest rate stance has encouraged both the stock and bond markets.
*With the disappearance of the lofty 15 percent interest rates once paid by money market funds and certificates of deposit, investors are finding new ways to maximize returns on their investments. In one of the most dramatic developments, billions of dollars have poured into Ginnie Mae, the Government National Mortgage Association, and government bond funds where investors can earn 11 to 12 percent with relative safety.
*With tax reform threatening to restrict certain types of municipal bonds, notably industrial revenue bonds, hundreds of tax-free issues have been rushed to market, causing a bulge in the supply and nearly wiping out the traditional gap between yields on taxable and nontaxable issues. This has made it advantageous for wage earners in almost any tax bracket to buy tax exempts.
*With the American investment base growing at 8.5 percent a year -- it now stands at $7 trillion -- there has been a vast increase in investment products in recent years, especially in the area of mutual funds. For the conservative investor, there are also zero coupon bonds and unit trusts, while the more sophisticated and speculative investor can try his hand at convertible bonds, options, index futures and options on futures.
Although investment experts bemoaned the market as lackluster as recently as August and September, a small but rosy glow now has begun to spread.
"I'm very optimistic on the market's prospects," said newsletter editor Norman G. Fosback, president of the Institute for Econometric Research in Fort Lauderdale, Fla. "The Standard and Poor's 500 will advance 20 percent to 25 percent in the next 12 months," he predicted. "That's two to three times greater than the market's general annual increase."
Fosback, who also studies trading by corporate insiders, noted that corporate officials are buying stock in their own companies as heavily as they did in mid-1982, before the start of the bull market. Corporate insiders "are generally right," he said.
Fosback also said the "public is still not really in the stock market." Instead, skepticism and disenchantment are the order of the day. "When the stock market is the last thing on people's mind, it suggests there is no heavy speculation," he added.
James B. Cloonan, president of the American Association of Individual Investors, who watches the investment world from a different vantage point, said he was struck by the low level of volatility in the market. "It is getting less volatile in the last few years," he said.
He attributed the higher stability to the vast sums of money held in pension and institutional funds and in mutual funds. Because fund managers find it difficult to move their money around, they tend to let it sit and cushion the market, he said.
A. Michael Lipper, the guru of the nation's mutual funds, said he thought investor perceptions were beginning to shift. He said "it looks as if people are taking the viewpoint that '86 and '87 look reasonably good, not ebullient but reasonably good. There is growing optimism."
Lipper, head of Lipper Analytical Services, tracks the performance of 884 equity, bond and specialized funds. A student of history, his optimism was tempered by some disquieting thoughts. "I happen to hear the loud ticking of a time bomb," he said, talking of the federal budget deficit, state and municipal budget problems, high levels of consumer debt and Third World problems.
The mutual funds Lipper tracks have been multiplying rapidly, particularly in the specialty sectors such as health, entertainment, food and agriculture, energy and telecommunications. International and global funds led the way in a recent Lipper performance report with 18 to 19 percent returns for the year Sept. 30, 1984, to Sept. 30, 1985. Sector funds in the health and utility area produced 20 percent returns for the same period. However, the third quarter, from June 30 to Sept. 30, found most funds racking up losses, including some of the health funds that had soared. Only the international funds held their own.
The biggest investor play these days is going to funds based on mortgage-backed securities issued by Ginnie Mae, to government funds that include Treasury obligations and other agency securities, and to single-state municipal bond funds that provide both federal and state income tax deductions.
Sales of government funds, for instance, rose to a staggering $23.2 billion in the first nine months of this year, compared with only $3.2 billion for the same period a year ago. Ginnie Mae fund sales soared to $8 billion from $2.1 billion during the same time frame. Single-state municipal bond funds moved up to $4.4 billion from $1.9 billion in the same period.
"The demand has been extraordinary," said Alfred P. Johnson, vice president and chief economist at the Investment Company Institute, the mutual fund trade association. He noted that "investors have become accustomed to getting double-digit rates" and when they were no longer available on money market funds and CDs, they turned to the government funds and Ginnie Maes for 11 to 12 percent returns. "Investors perceive them to be quality credits," he said.
Although Treasuries and Ginnie Maes are backed by the U.S. government, the principal and the yield of the funds will vary with market and interest rate conditions, which means they carry some risk.
One other key trend in the investment climate is the drive for tax-exempt income, often through municipal bond funds. Johnson noted that part of the drive comes from families with two wage earners, seeking to reduce their tax burdens. Part of the pressure is tied to the yields on the flood of new tax-exempt issues.
Robert F. Keller, a financial management adviser with E.F. Hutton & Co., Bethesda, pointed out that the gap between taxable and nontaxable bonds had narrowed dramatically. For instance, he compared two bonds: The first was a taxable zero coupon Treasury bond maturing in 2001 and offering a yield to maturity of 10.25 percent. The second was a Maine nontaxable municipal zero bond also maturing in 2001 and offering a yield to maturity of 9.8 percent.
Normally, to get tax savings, an investor would have to accept a 25 percent lower rate of interest on a tax-exempt bond than he could get on a taxable bond. With both types of bonds offering similar yields, the investor gets his interest rate and his tax savings as well, Keller said.
"We're suggesting that people invest in municipal bonds," said Keller. He said that the number of municipal bonds currently coming to market has doubled compared with last year, but he believes the bulge in supply will slim down. "I expect it to go back to normal," he said.
Keller noted that zero coupon bonds, one of the newer financial products, are favored by some investors because they know exactly how much money they will get when their investment period is over. Zero municipal bonds also provide tax savings. Issues rated A or better have a "high degree of safety," he said. On a taxable zero, however, the investor must pay the accrued taxes annually, even though he does not receive the money until the end of the investment period.