TALK OF THE STREET
Excerpts from current market commentary by analysts at major and regional brokerages, editors of investment newsletters and portfolio managers
Gary Schlossberg, economist, Wells Fargo Investment Management, San Francisco
The markets’ setback [last week] is more likely a correction after the powerful rally of recent weeks than the start of an extended decline in stocks and bonds. First, U.S. markets continue to benefit from strong foreign investment. The dollar could be tested in coming weeks by German efforts to downplay further interest rate cuts and by reemerging trade tensions with Japan. However, “easy” monetary policies to spur lagging economies abroad continue to unleash large amounts of investable funds to the U.S. One indication of that strength: Average increases in the Federal Reserve’s custody holdings of U.S. securities, on behalf of foreign central banks and other official institutions, climbed to a two-month high of nearly $4 billion during the four weeks to Dec. 4.
Second, recent U.S. economic data still are consistent with modest fourth-quarter growth only slightly stronger than the third quarter’s sluggish 1.6% [gain in real GDP]. The Fed’s “beige book” survey of regional conditions and a few other key releases were encouraging, but the overall tone of the data was soft. The economic outlook going into 1997? A return to long-term growth of about 2.5% during the first half of the year. Any interest rate hike in response to a strengthening economy isn’t likely before the spring or summer at the earliest.
Norman G. Fosback, editor, Market Logic newsletter, Deerfield Beach, Fla.
The Dow pierced the 6,500 level [in November] amid euphoria that interest rates are headed sharply lower and that inflation is not only tamed but less severe than originally thought. Perhaps we will look back on all this someday as a textbook example of ignoring everything except the temporary invincible appeal of the greater fool theory. We believe that risk-averse investors should not ignore the traditional, time-tested measures of value that now call for caution, and that is why we recommend being only 40% invested in recommended equities, while holding a 60% liquid reserve.
Interestingly, the rate of advance to date [in the Standard & Poor’s 500-stock index] from the market low in mid-1982 is at approximately the same pace as the long rally from the 1949 lows to the 1966 high--the latter being a time, such as now, when it came to be believed that market timing was permanently out of vogue and that the bullish trend would be perpetual. But note that between early 1966 and mid-1982, the market on balance declined across a span of more than 16 years. Our current forecasts are far from being that pessimistic, but it should not be forgotten that long periods of excessively generous market valuations can lead to long periods of stagnation.
John R. Williams, economist, Bankers Trust Co., New York
Friday’s employment report provided further testimonial to the Fed’s success in slowing the economy to a moderate pace of around 2% growth, thus once again avoiding the twin perils of rising inflation or recession. The modest increase of 118,000 payroll jobs was below consensus expectations and was accompanied by a 0.2-point rise in the unemployment rate to 5.4%. Payroll growth over the past four months has averaged 155,000, well below the 234,000 pace seen earlier in the year and near the rate consistent with sustainable, noninflationary growth.
At the moment, the economic fundamentals appear to form a healthy backdrop for the financial markets. Nevertheless, we believe that Federal Reserve Chairman Alan Greenspan [last week] was in effect reminding the markets that the future is not risk-free. Despite the less vibrant tone of the economic data, labor resources remain tight, and only a modest pickup in economic growth would put the economy into inflation-prone territory early next year. We continue to expect the economy to gain some strength in the coming quarters, largely as a result of a rebound in consumer spending, and this likely will rekindle market fears of a Fed tightening. In the meantime, though, Greenspan is trying to let the markets down easily.
Elaine Garzarelli, editor, the Garzarelli Outlook newsletter, Boca Raton, Fla.
Why am I so convinced the stock market will soon crash? Here are just a few of the reasons: 1) Bonds are much more attractive than stocks. 2) The historically low dividend yield [on the S&P; 500 index]. 3) A weak [economic] recovery is giving way to a slowdown, perhaps even a recession. 4) Corporations have very little pricing power. This is a classic sign that corporate earnings are soft and vulnerable to further declines. 5) Interest rates will likely rise. Due to high consumer debt, at some point, probably quite soon, the Federal Reserve will raise interest rates as an insurance policy against inflation. 6) [There are] too many bulls. Americans now have the highest percentage of their net worth in stocks--63%--than at any other time in U.S. history. When so many investors are optimistic, it means that there’s very little buying power left to hold stocks up.
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