Market Watch : Rocketing Toward 3,000
The most appropriate rallying cry on Wall Street now may be “3,000 or Bust!”--because either the bulls know exactly what they’re doing, or they’re going to have a very rude awakening soon.
With a 24.31-point rally Friday to a record 2,900.97 close on the Dow Jones industrial average, Wall Street can now focus on the historic 3,000 mark. A key ingredient in the fuel mix for this market rocket is the belief that interest rates are coming down.
Friday’s rally was sparked by the government’s report that job creation was extremely slow in May, which prompted new recession concerns. Bond yields plunged on the news, because bond traders believe it’s now inevitable that the Federal Reserve will ease credit to reignite the economy.
If you assume that that frame of mind will dominate on Wall Street for the next few weeks, it’s easy to make a case for a Dow of 3,000 soon. Figure it this way: A lot of big investors are still flush with cash, having sat on the sidelines in disbelief as the stock and bond markets rallied since April. If they buy stocks with that cash, they send the market up directly. If they buy bonds, they send interest rates lower, boosting stocks indirectly.
“A guy who’s running real money has to feel the pressure now,” said John Connolly, investment strategist at Dean Witter Reynolds in New York.
Wall Street brokerages, which advise many big investors on the proper portfolio mix of stocks, bonds and cash (money market investments), may help drive the stock rally by changing their recommended mixes further in favor of stocks and/or bonds over the next few weeks. Although some brokerages, such as Dean Witter, are already super-bullish, others, such as Donaldson, Lufkin & Jenrette, are still recommending substantial cash holdings.
Charles Clough, strategist at Merrill Lynch & Co. in Boston, recommends a portfolio of 40% stocks, 55% bonds and 5% cash. Yet Clough admits that “my heart is probably 50-50 (stocks and bonds).” Why not raise the stock portion officially? If 30-year Treasury bond yields fall from about 8.5% now to 8% during the next six months, “the Dow would have to go to 3,300 to beat a bond,” if you’re figuring in the bond’s interest earnings plus capital gain potential, Clough says. He sees less risk in bonds.
Connolly, however, maintains that the best place to be now is in stocks that do well in a slow-growth economy, because that’s what we have, he says. He sees investors continuing to bid shares of drug, retail and beverage companies sharply higher, and sees the overall market driving the Dow to a peak of 3,200 this year.
What could go wrong with the bulls’ outlook? Simple: Either interest rates don’t fall or a recession arrives. On the rate front, the big question is how long Wall Street will wait for the Fed to cut. If there’s no signal by late June, it may be time to reassess stocks’ chances of going much higher near term, some analysts suggest. Of course, by then the Dow could be well over 3,000.
As for economic worries, Eric Miller, strategist at Donaldson, Lufkin & Jenrette, still sees the chance of a recession as 50-50. That’s a view that few Wall Streeters share; which means it doesn’t take much imagination to figure out what would happen to stocks if Miller is right and the rest of the Street is wrong.
INVESTMENT MIX
How some brokerages currently recommend that big investors divvy up their portfolios:
Brokerage Stocks Bonds Cash Dean Witter 85% 15% 0% Shearson Lehman 65% 30% 5% Pru-Bache 55% 35% 10% Merrill Lynch 40% 55% 5% Donaldson Lufkin 40% 40% 20%
Source: Brokerages listed
What if the Economy Booms? While many investors are concentrating on the business slowdown, economist David Levine at Sanford C. Bernstein & Co. in New York predicts that the surprise will soon be the start of a dramatic rebound. Levine notes that businesses have been liquidating their product inventories for six straight months. Historically, such massive liquidations almost always have presaged economic booms rather than ended them, he says. “Presumably, we’ve primed the economy for a big pickup,” he says, as businesses begin restocking shelves.
Levine sees annualized gross national product growth soaring from 2.3% this quarter to 4.3% in the third quarter and 5.5% in the fourth. And with that growth, he sees interest rates rising again. While on the face of it that should be bad for stocks, Levine also says corporate profits should soar with the economy, supporting stock prices. He notes that as companies have streamlined in recent years, they’ve gained extraordinary earnings leverage: It doesn’t take much of an increase in demand to translate into sharply higher profits.
Briefly: The plunge in L.A. Gear’s stock price last week could mean trouble for Pacoima-based K Swiss, a rival athletic shoe maker. K Swiss plans to go public this month, but investors may balk at paying a high price for the shares if they fear something’s amiss in the shoe business. . . .
Broad Inc., the Los Angeles-based financial services giant, is running some dramatic new ads to hype its SunAmerica trade name, the line under which it sells insurance and mutual funds. The ad, a four-page centerfold in the June 11 issue of Forbes, features an almost blinding photo of a sun, printed on heavy-stock glossy paper. It may be only a coincidence that the stock got a big lift last week, to $8.75, up $1.125 for the week. Frederick Wise at Bear Stearns says Broad remains a cheap stock, hurt by what he says are unwarranted fears about its small junk-bond holdings.
