Stock Market Quarterly Review -- Essay: Feel-Good Factor Might Float Away; Renewed Doubts Include the Dollar, Recovery's Strength, Interest Rates and Stock Valuations
LIKE MANY OTHER fund managers, Michael Kagan, a managing director at Salomon Brothers Asset Management, has been optimistic about the economy. In September, he filled his portfolio with paper companies and makers of heavy trucks, companies that do well when the economy is growing. "This is a classic cyclical recovery," he says.</br></br>While share prices have moved up, so have earnings. "Valuations," he adds, "are exactly where they were" at the beginning of the year."We have just had the most massive stimulus ever," Mr. Kagan notes, referring to the windfall combination of low interest rates, rapid monetary growth and generous tax cuts.</br></br>But the feel-good factor seen through the summer could easily be replaced by renewed doubts. "It is a fairly abnormal environment," says Bruce Kasman, chief U.S. economist for J.P. Morgan Securities. "Low interest rates have some medicinal effects. They help, but they aren't a permanent fix for everything."</br></br>Still, even after the recent stock-market declines, the alternatives are lousy. Bank deposits earning less than 2%? No thanks. A return on 10-year Treasurys under 4%? Please. Besides, Chevron Texaco Corp. pays a dividend close to that, and the tax on that dividend has just been cut to 15%.</br></br>"Investors are no longer seeking a hiding place," says Jeffrey Knight, chief investment officer for global asset allocation at Putnam Investments in Boston. "Every indicator we see suggests that there is low regard for risk."