Do Stocks Shun the <i> D </i> Word at Their Peril?

Ever since the 1930s Depression ended, some people have been predicting the next one. They’ve been wrong all this time, of course--and 50 years is a long time to be wrong.

But this week, the feeling that something is desperately troubled in the world economy came home in spades for many people:

* In the United States, Federal Reserve Chairman Alan Greenspan lamented, “There is a deep-seated concern out there, which I admit I have not seen in my lifetime.” He’s 65. As if to punctuate Greenspan’s fears, General Motors announced that it would eliminate nearly 20% of its work force.

* In Japan, stock prices crumbled anew, raising the specter of a second crash for a market already down 43% from its peak at the end of 1989. There is no faith in Japan about corporate profit growth in 1992.

* In Germany, the central bank raised interest rates to all-time highs in an attempt to fight wage inflation. The rate hike, a clear slap in the face to the rest of Europe--which must dance to Germany’s tune--is certain to slow the only major world economy that was still on a decent growth track.

Now, come back to the United States. In the wake of all this, the Dow Jones industrial average didn’t even blink. It inched up 6.27 points to 2,914.36 Thursday, exactly where it closed last Friday.

Many of the stock market’s biggest bears believe fervently in the idea of a New Depression, and they keep waiting for a 1929-style Dow Jones crash to herald it. But the market refuses to cooperate--at least on the surface.

So Wall Street and Main Street alike are left to wonder: Why should we even consider the possibility of a 1990s Depression if the stock market says it isn’t so?

Let’s not pretend that anyone is smart enough to know the unequivocal answer to that question. But in light of the dangerous crosscurrents sweeping the world economy on the eve of a new year, it’s time for even the most optimistic investors to begin accepting some realities:

* Some stocks are flashing red. It’s true that the Dow index is off only 5.3% from its fall peak of 3,077.15. But the Dow often masks what’s happening in the broad market. Look deeper, and you see investors have been fleeing many stocks. The nation’s largest retailers, for example, have seen their shares fall 20% to 35% from their 1991 highs, a clear reflection of worries that consumer spending may continue to plunge.

* Complacency runs too high. The newsletter Investors Intelligence, which weekly surveys investment advisers nationwide, finds 40.7% bullish, 39.8% bearish and 19.5% betting on a simple market “correction” in the near term rather than a steep plunge. Given the shape of the economy, 40.7% bulls is a highly optimistic reading.

Similarly, the Blue Chip Economic Indi cators newsletter of Sedona, Ariz., which tracks leading economists’ projections, says not a single one of these experts believe that the economy will show a net contraction in 1992.

If you buy the time-honored concept that the market and the economy often do exactly the opposite of what the majority of experts forecast, the complacency about a potential crash/Depression is at least worrisome.

When the economy is sinking, “the usual progression (in the stock market) is from complacency to worry to outright fear and capitulation,” says David Allman, director of research for market analysis firm Elliott Wave International in Gainesville, Ga. “The public has shifted from complacency to worry, as reflected in the record lows registered in consumer confidence. But professional money managers and investors are still complacent and pouring record amounts of money into stocks and bonds.”

* Don’t assume we can recognize a Depression before it’s here. If the global economy were really to come unraveled, would it look like the 1930s again? Probably not. The world is a much different place. And there are more safety nets--such as a federal government willing to go in the hole $400 billion a year to keep the country afloat.

Maybe we won’t return to bread lines across the United States or wheelbarrows full of currency in Berlin. But if there’s no economic growth in America, or very slow growth, for a long time, the stock market might come to reflect that only gradually--in other words, there will be no crash, just a slow, agonizing destruction of a lot of stocks throughout 1992.

Abby Cohen, a veteran economist and market watcher with Goldman, Sachs & Co. in New York, doesn’t buy the Depression idea, period. What’s occurring, she says, is the transition of the formerly consumption-driven, import-crazy, save-no-money U.S. economy to one in which people buy a lot less and invest a lot more.

That transition will mean trouble in the interim for a lot of companies, Cohen admits. But it’s not the end of the world, and ultimately it puts America on excellent footing to compete with the rest of the world in the 1990s, she says--because lower consumption means that interest rates here stay down, making for cheap capital for companies that have the guts to expand.

The question on Wall Street, though, is one of time: Can stock prices blithely hold up while this economic transition unfolds--with all of the potholes and bad news along the way?

So far, the answer has been yes. Stocks have been winning in part because of a lack of alternatives, especially with interest rates dropping. But even if you’re a prudent investor who believes that Depression talk is bunk, be realistic: An increasingly troubled world economy in the short term could potentially be brutal for stocks in the clear air of a new year. The market hasn’t blinked yet, but it’s flinching.

Depression Early Warning?

Retail stocks took another severe hit on Thursday, continuing their broad slide of recent months. If Wall Street is crushing the retailers because no upturn in consumer spending is imminent, that raises big questions about the economy as a whole.

Thurs. close 1991 Drop from Stock and change high ’91 high Wet Seal $7 3/4, -- $18 -57% Woolworth 23 5/8, - 1/2 36 3/8 -35% Gottschalks 17 3/8, - 1/8 26 3/8 -34% Price Co. 44, -4 1/2 65 1/4 -33% Dayton Hudson 57 3/4, -2 1/8 80 1/4 -28% May Dept. Stores 46 3/4, - 3/4 60 3/8 -23% Sears 34 1/8, - 3/8 43 1/2 -22% Limited 25 1/8, -2 1/4 31 5/8 -21% J.C. Penney 47 1/4, -2 1/8 58 1/4 -19% Circuit City 21 7/8, -1 3/4 26 -16% S&P; 500 382.51, -0.97 397.41 -4%

All stocks trade on NYSE except Wet Seal and Price Co. (NASDAQ).