NEW YORK -- Suddenly, the prospects for defense spending don't look as bad as they did last fall. As usual, the stock market foresaw the change of mood. Beginning last summer, when the Soviet Union started falling apart, and continuing through the Iraqi invasion of Kuwait, investors ran the defense stocks up the flagpole.
But Howard Rubel, defense analyst for the New York brokerage firm C. J. Lawrence, says the major defense contractors aren't easy to rate.
They tend to have many divisions -- one perhaps prospering from the gulf war while another one suffers from recent cuts in the defense budget.
Take McDonnell Douglas. The division that makes the showcase Tomahawk cruise missile should be robust, Rubel says. But its A-12 attack plane has been canceled, and the government is demanding a $1.9 billion refund from McDonnell and its co-contractor, General Dynamics. So, despite its war successes, the company's profits are being squeezed.
For purchase, Rubel prefers Raytheon, which makes Patriots and is the nation's largest supplier of tactical missiles and the second-largest defense-electronics contractor.
Stocks in general seem to be poised on tippy-toe, especially those of smaller companies. The NASDAQ index of over-the-counter stocks rose 7.2 percent in January, compared with 1 percent for the blue-chip stocks in the Dow Jones industrial average. Small-company growth funds are beating all other diversified mutual funds. Small stocks have lagged the blue chips for nearly a decade. Investors are hoping that the long-awaited catch-up has finally arrived.
But many an analyst thinks that what's rousing investors' animal spirits is no more than a winter thaw.
Melissa Brown, an analyst for Prudential Bache, won't buy into the bull-market case until she sees general corporate earnings turning up. She doesn't expect that to happen until late fall.
For purchase now, she likes the utilities. They benefit from falling interest rates and are relatively unaffected by war.
She's also looking at technology companies whose products will build more efficiency into American goods and services.
The international stock-owning mutual funds slumped badly last year because of economic reverses in several countries and the sharp rise last fall in the price of oil.
Investors suffered an average 12 percent loss in dollar terms, about twice the 6.3 percent decline in U.S. diversified mutual funds.
Guy Rigden, chief international strategist at the British investment house UBS Phillips & Drew, sees another rough ride in Europe for the next six months, followed by "a happy ending," thanks to lower oil prices and interest rates. Americans socked a record $6.5 billion into foreign stock funds last year. Rigden thinks you should come out and play again.
Your main risk, as outlined last week by Alan Greenspan, chairman of the Federal Reserve Board, is that the gulf war will drag on for more than three months.
That could damage confidence, abort an early recovery and slash stock prices. For that reason, the danger to the optimists in being wrong is potentially greater than their reward for being right.
Conclusion: prudence, prudence for '91.
Cautious investors will keep on buying stock funds for their retirement savings plans, preferably on a program of regular monthly purchases. Even if you get chopped up this year (and you might not), you should show substantial growth 10 years from now. But you might want no more than half of your money at risk.
For the safe half of your investment, choose Treasury securities. By last year's third quarter, individuals had bought 17 percent more Treasuries than they did a year earlier, both for fear of the economy and for fear of banks.
Don't bother with Treasury mutual funds. They're not worth their annual management fee. Treasuries are default-proof, so you don't need the diversity that mutual funds provide. Buy individual securities instead, or buy federally insured certificates deposit, which are just as safe.