Excerpts from current market commentary by analysts at major and regional brokerages, editors of investment newsletters and portfolio managers
Richard F. Hokenson, chief economist, Donaldson, Lufkin & Jenrette Securities, New York
Fed Chairman Alan Greenspan’s testimony [to Congress last week] indicates a shift on his part toward tightening monetary policy. If he adheres to what has been his normal practice of announcing policy changes at scheduled Federal Open Market Committee meetings, then the next opportunity would be the meeting scheduled for March 25.
We remain of the opinion that the “inflation” that the Fed is targeting is “inflated” stock prices. The key point to stress is that the chairman of the Federal Reserve Board is in some sense substituting his judgment for that of the market. There are many, including ourselves, who question the wisdom of that shift. But it is also important to stress that investors should pay close attention to what he says.
Our interpretation is that his bias is concern about a downturn in the market and the economy rather than the risk of an overheating economy in response to higher asset prices. Complacency about the future could lead to a highly overvalued market, amplifying the financial and real risks on the other side when the “bubble” bursts.
While the Fed may be behaving in an unusual fashion by tightening prior to any substantive signs of rising inflation, we think it will also respond when the accumulated evidence shows that economic growth has stalled. Thus, any Fed tightening should prove to be relatively temporary.
*
Peter J. Canelo, chief investment strategist, Dean Witter Reynolds, New York
Our review of [market] price-to-earnings ratios on both trailing and projected operating earnings, as well as P/Es on various “normalized” earnings concepts, suggests that the market is roughly 9% above fair value, with the Standard & Poor’s 500 [recently] around 808 and the Dow Jones industrials at 7,000. However, we have also found that major bull markets have not faltered until the market multiple averaged about 20% above fair value.
Economic fundamentals favor equities. Growth in first-quarter 1997 real gross domestic product should come in a little slower than in the fourth quarter of 1996, but we anticipate that it will still show a healthy, above-trend gain. That is certainly the message of the tight labor market.
Consumer spending is proceeding at a rapid pace. Auto sales are firming, and weekly retail sales comparisons haven’t looked as strong since early last year. Redbook Research reports that store sales in the first two weeks of February shot up an eye-popping 2.8% over an already-strong January. ... This is an ideal scenario for cyclical stocks. A number of economically sensitive basic industries [have been] among the best-performing groups in the market. They include mining/minerals, aluminum, steel, truckers, autos and specialty retail.
*
Bob Gabele, editor, CDA/Investnet Insiders’ Chronicle newsletter, Rockville, Md.
The Securities and Exchange Commission [recently] voted on the long-awaited change in the Rule 144 process, which governs the period that company insiders or affiliates must comply with before reselling restricted stock to the public. Simply stated, the waiting period of two years will shrink to one year. The holding provision for sales under Rule 145, which covers restricted securities held by nonaffiliates of an issuer, was also changed. In these cases, the three-year holding period has been reduced to two years.
This rule change becomes effective 60 days after its publication in the Federal Register on Feb. 20. [So] this action may have a major effect on stock market liquidity in the days immediately following April 21.
Gauging the effects of this rule change will not be precise. [But the net effect] is that insider sales that would have occurred as much as one year down the road will be compressed into an initial late-April blast. We feel that this compression of extra insider selling could extend into the summer months before stabilizing.
