A Coupla Bears Tell Why They’re Still Growling
The bulls have controlled the podium on Wall Street for the past few weeks, and rightly so. Their forecast of a “soft landing” for the U.S. economy in 1995 fits perfectly with the markets’ action, as blue-chip stocks have hit new highs and bond yields have sunk to six-month lows.
Naturally, though, not everyone is convinced. Many market bears, although chastened by the latest turn of events, aren’t changing their tune. Most think that stocks’ current rally is a sort of last gasp for the bulls before share prices plunge again.
When sampling downbeat market views, however, it’s usually smart to separate the “permabears” from the sometime-bears. The permabears always seem to think the world is ending and that there hasn’t been much justification to buy stocks since the mid-1980s. They have, of course, been dead wrong.
The sometime-bears, on the other hand, are analysts who have been both bullish and bearish in their careers but who now believe for various fundamental and-or technical reasons that stock prices are way too high. Many of the sometime-bears called last year’s market slide, but the Dow and other stock indexes never went as low as most sometime-bears predicted, and the market’s rebound this year has surprised them.
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Why do they stay bearish? Here’s how two respected sometime-bears justify their negative stance:
* Andrew Addison, editor, the Addison Report newsletter in Franklin, Mass.: Addison is a “technician,” meaning he fashions his forecasts based on the internal dynamics of the market--the number of stocks rising versus the number falling in a particular period, for example, or chart patterns traced by key market indexes. Despite the optimism engendered by the Dow index’s rise above 4,000 last week, Addison says the stock market presents a woefully poor technical picture.
First, he notes, indexes of smaller stocks, such as the Russell 2,000, remain well below their all-time highs. Historically, Addison says, “prior to important market liftoffs, the ‘secondary’ stocks begin to outperform the blue chips quite noticeably.” That isn’t happening.
Second, even with the Dow at a record, “the number of stocks reaching new highs on the New York Stock Exchange has been pitiful,” Addison says. When the Dow first closed above 4,000 last Thursday, for example, only 97 NYSE stocks (out of about 3,000 total) hit new highs. That bespeaks a very narrow market advance, he says.
Finally, Addison worries about the recent stumble in the Dow utility index. Utility stocks often are excellent harbingers of interest rate trends, and the Dow utility index’s rally in December did indeed foreshadow bond yields’ subsequent steep slide. But the index has been waffling for three weeks--which Addison believes may be pointing to a rebound in bond yields and a selloff in stocks that could finally produce “a bona fide bear market,” meaning a 15% to 20% decline.
* John Hussman, editor, Hussman Econometrics newsletter, Farmington Hills, Mich.: Hussman, who focuses on the macro trends in the economy and how they shape markets, was bullish on stocks (correctly) from late 1990 till late 1993. But the turnaround in interest rates a year ago made him a bear, and he sees no reason to change that view.
Why not? Inflation will go up this year even as the economy slows, Hussman says, because the Federal Reserve has pumped too much money into the financial system since 1990. (There’s a lag effect with money growth.) As inflation rises, interest rates will rebound, he says. And stocks will fall.
Investors who like simpler signposts need only look to the dividend-yield indicator, Hussman says: Whenever the average annualized dividend yield of the Standard & Poor’s 500 stocks has remained below 3% for too long, trouble has typically ensued in the stock market.
The S&P; yield now is 2.79%, not far above its historic low of 2.65%. And the two occasions when the yield reached 2.65% both coincided with market peaks--in August, 1987, and in January of last year, Hussman notes.
In other words, he sees any additional upward move in stock prices as a likely precursor to another broad market decline of perhaps as much as 25%, to a Dow of 3,000. It’s not the end of civilization, Hussman says: “Stocks are just due for a natural, normal, run-of-the-mill bear market.”
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Trouble Coming?
The Dow Jones utility stock index, historically a harbinger of broad market trends, has stumbled in recent weeks after leading Wall Street higher since late November. Biweekly closes, except latest:
THURS.: 190.02
