ROBERT VON PENTZ will be watching the Federal Reserve Board with particular care this week.
As chief investment officer for Riggs Investment Management Corporation (RIMCO), the investment arm of Riggs National Bank in Washington, Mr. von Pentz helps manage financial assets of around $3 billion. The question he and other investment managers now face is whether the Fed - in an effort to avoid more inflation and ease concerns in the United States bond and equity markets - will soon boost interest rates, as it did Feb. 4.
Financial markets reacted with excitement Friday to news that Alan Greensman, chairman of the Fed, had cancelled a trip to Houston for a short speech to meet with President Clinton and his top advisers. Later it was seen as a storm in a teacup.
Some investment strategists say another rate hike could come as early as tomorrow or by early April. The Fed's policymaking body, the Open Market Committee, meets tomorrow. Whatever action the Fed takes is expected to have a major impact on US financial markets.
Bond and stock markets have been struggling to stabilize. If the long 30-year bond can stay under 7 percent, von Pentz says, that will not only mean stability for the fixed-income market, but will ease concerns about rising rates within the stock market. Von Pentz remains upbeat: He says ``the long bond will stay in the 6.75 percent to 7 percent range for the rest of the year.'' (The long bond closed at 6.9 percent Friday, up from 6.82 percent.)
Like many investment management concerns, RIMCO has a diversified portfolio. The biggest chunk of its portfolio (assets of around $1 billion) is in bonds; assets of around $700 million are invested in stocks; the remainder is in cash-related instruments, such as money market accounts.
Despite economic gyrations within bond and stock markets in recent months, von Pentz is optimistic about the expanding US economy and the securities market. The Dow Jones industrial average, he says, ``could reach over 4,000 points this year, and perhaps the 4,200 point level.'' His main concern is that the economy will overheat, ignite inflation, push up interest rates, and thus deflate financial markets. The stock market, he says, is currently in transition, moving from an interest rate-driven market to an earnings-driven market.
Larry Wachtel, a vice president with investment firm Prudential Securities Inc., agrees. He notes the gains registered last week in small company stocks, especially high-technology issues. ``For three years the market was driven'' by low interest rates, Mr. Wachtel says. That is no longer the case. But given the economic expansion, many firms are producing superior earnings. Investors, he says, are now seeking out earnings-driven winners.
Prudential had been fretting about a market correction - possibly on the order of 5 percent or more, and now that has occurred, Wachtel says. That means the market has the flexibility to expand again, he says.
Precisely because of the expanding economy - and the potential for a trading rally - some brokerage houses have recently reduced cash positions to take account of bargains. Kemper Securities Inc., an investment house, is a case in point. It recently reduced its cash position from 25 percent on its model portfolio to 20 percent for small cap issues. Still, according to a new study by chief investment strategist William Newman, Kemper remains ``cautious,'' given the three-year duration of this bull market.
Von Pentz says he wonders how long current earnings gains can last, given rising commodity prices, for example. But for now, he expects such sectors as capital goods and technology to post solid returns.