Turnaround Time for Investment Strategies; Slowing Economy Means Growth Stocks Will Be Back -- But With Some Differences This Cycle
If I read it correctly, the handwriting on the wall says: Enjoy the stock and bond rally while you can. The economy is slowing down, and even if we avoid a full-fledged recession, investment strategies have reached a turning point. Stocks that flourished when the economy boomed will begin to fade; defensive stocks will become favorites again. In short, growth stock funds are back.</br></br>I've spent several days talking to the managers of growth funds about the slowdown in the economy and what it means to their funds. By and large, they agreed that funds that invest in large consumer companies are likely to perform the best. Traditionally, these are the stocks of food, beverage and pharmaceutical companies -- makers of the products that individuals will continue to buy even when times are tough.</br></br>Consumer stocks generally move back into favor when companies that are adversely affected by a weak economy -- such as steel, auto, chemical and manufacturing firms -- begin to see their profits wither. That, in turn, causes investors to leave for greener pastures -- usually for consumer stocks and their steadier profits.</br></br>John D. Gillespie, manager of the $2.4 billion T. Rowe Price Growth Stock Fund, described the investment cycle. He invests in companies that increase their profit an average of 15 percent a year, he said. But, he said, that number doesn't look so good when a recession ends and steel, auto or chemical companies begin to churn out earnings increases of 50 percent to 60 percent. So investors move away.</br></br>In time, however, the cycle turns, as it is doing now. "The economy accelerates to the peak," he said. "All the way up, the market favors value or cyclical stocks. Once the economy peaks, the tide turns and the market moves back toward my `Steady-Eddie' companies growing 10 percent to 20 percent a year."