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SPRING 2003

INVESTING FOR GROWTH/Online Extra

Q&A with Elaine Garzarelli
The stock guru says the current "flattish market" could last for years, so "catch each rally and get out"


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Elaine Garzarelli rocketed to stock-market fame in the late 1980s when she called the 1987 crash within weeks of Bloody Monday. These days she thinks stocks will be stuck in a holding pattern for years to come. Garzarelli, who now runs her own research firm, Garzarelli Capital, says the new market environment calls for new investing rules. BusinessWeek Personal Finance Editor Susan Scherreik recently spoke to Garzarelli about her views. Following are edited excerpts of their conversation:


Q: Why don't you think investors should follow a buy-and-hold strategy anymore?
A: The buy-and-hold strategy was a good idea during the bull market that lasted from 1982 until March, 2000. Even though there were several down phases during that period, investors who stayed in the stock market the entire time still came out ahead.

Q: What has changed?
A: We're in a flattish market that could persist for many years to come. Markets of this type can last for 10 to 15 years.

Q: What's causing this horizontal market pattern today?
A: The stock market is still not as cheap as it usually is at the bottom of bear markets. So what we're going to see going forward is a market that rises to the point where it becomes slightly overvalued and then comes down again. That pattern will continue as we work out the excesses of the 1990s stock bubble.

Q: How do you make money in this environment?
A:You've got to catch each rally and get out, or you'll lose it all again and be right back where you started.

Q: Timing the market is tricky. How do you do it?
A: We've built a quantative model that uses 14 indicators to tell us when to get out of the market and go to cash, and when to get back in. There are four large categories of indicators: Economic-cycle indicators, stock valuations, investment sentiment, and monetary-policy indicators.

Q: What's the model telling you right now?
A: The stock market is 18% undervalued, so we're due for a rally.

Q: What's the best way to catch the rallies?
A: Buy stocks in the right sectors. Ninety percent of stocks in an industry will move if the industry's growth prospects are better than the economy as a whole. Restaurants, building supplies, financial institutions, and semiconductors are sectors I believe will outperform the broad market during rallies.

Q: During your 25 years on Wall Street, what was your biggest blooper?
A: My worst call was in 1996, when I turned bearish.

Q: And your best call?
A: That was in 1990 when we had the Gulf War. I called the exact top and bottom of the market.

MARCH 24, 2003




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