Stock Market Clock May Soon Strike Midnight
Investors are pushing the stock market to record highs, but fitfully, with all the confidence of Woody Allen in a doctor’s office. Professional money managers appear to be putting money into the market one day and pulling it out the next, as though they expected the music to stop at any moment.
They have reason for anxiety. The underlying U.S. economy today is not strong enough to support the market’s enthusiasm, and it is not gaining. The force driving stock prices up is declining interest rates (and oil prices). Well, interest rates decline when lenders have lots of money but borrowers don’t have lots of need for it; that is, when business is slow. Like now.
Every new statistic--retail sales off a bit, unemployment up a bit--indicates that the economy is only so-so. Which wouldn’t be so bad if the outlook for the economy were better. But it’s not.
Despite lower interest rates, business doesn’t seem in a hurry to invest in new plants and equipment.
“Where is investment supposed to come from?” asks Norman Robertson, chief economist at Pittsburgh’s Mellon Bank. Oil companies are reducing their capital budgets (Exxon just announced a 26% cut in its exploration budget), and commercial construction is slow because too many office towers, built in recent years, remain half vacant. International Business Machines suggests a cautious outlook for the second half, and nervous money managers wonder if the economy isn’t trying to tell them something.
What does it all mean? Only that the economy will putter along--no disaster but no great glory either--and the stock market will probably take a sharp decline.
When? Oh, say the experts, after it rises a little more on sheer momentum, probably when it hits 1,800 on the Dow, probably in the spring.
But for the ordinary person, trying to pick moments in the stock market is foolish. What you should be doing is looking for the underlying trends in the U.S. and world economies. What is happening, say business people with some perspective, is not some routine cyclical shift but the kind of changeover that disrupts many assumptions of recent years.
Change is not decline; some things rise while others fall. For example, says Francis Kelly, chief economist of Oppenheimer & Co., developing countries, farms and oil and gas projects benefited from high levels of borrowing in the late 1970s but got walloped in recent years.
So, if patterns hold, the beneficiaries of debt in recent years are about to get clobbered. Kelly lists three beneficiaries: the federal government, which ran deficits; commercial construction, and the stock market, which benefited mightily last year from corporations borrowing money to buy back their own stock.
Now Gramm-Rudman and public sentiment are curbing the government’s deficit. Construction has slowed. And the stock market--with takeovers and buy-backs less attractive at today’s prices--is in for a sharp decline.
And what is likely to be rising in the new cycle? A lot of smart people see a turn of fortune for U.S. trade. In recent years, of course, the United States has been running massive trade deficits, putting as much as $150 billion in the hands of foreigners. While U.S. interest rates remained high, the foreigners poured those dollars back into U.S. Treasury bills and other financial investments. But now, with U.S. interest rates declining, you could make a good argument that foreigners will exchange their dollars for U.S. goods.
The changeover will take time. But, “Look at the hour hand, not the minute hand,” advises a man who has been in business on Wall Street since 1928. This man sees declining inflation and oil prices, as well as last fall’s currency agreement by the United States, Japan, Germany, Britain and France, to be ushering in a new era in world trade. The “hour hand”--not a bad metaphor when you think about it.
