Where the Bulls Say the Market Is Heading Now
The bulls had it right. But now what?
Amid the stock market’s worst moments in September and early October, a relative handful of Wall Street strategists were exhorting their clients not to join the panicked selling, but to buy--aggressively.
With the Dow Jones industrial average rocketing to a new high Monday--before losing 73.12 points to 9,301.15 on Tuesday in mild profit-taking--those bulls have earned, or re-earned, their oracle status.
What are they telling their big-money clients to do now? Here’s what three market strategists had to say during the market’s plunge, and their current outlooks for stocks:
* Abby J. Cohen, investment strategist, Goldman, Sachs & Co., New York: Cohen, perhaps Wall Street’s best-known and most respected bull, made a gutsy call Sept. 1--one day after global financial meltdown fears sent the Dow down 512.61 points to 7,539.07.
Cohen changed her recommended portfolio allocation for aggressive investors to 95% stocks, from 90%, cutting the “cash” allocation from 10% to 5%.
“The United States continues to enjoy moderate economic expansion that creates new jobs and supports modest profit growth with little inflation,” Cohen assured her clients in a report. Don’t worry about global turmoil; it won’t affect the U.S. much, she said.
As it happened, Aug. 31 was the Dow’s closing low in the market downturn--a drop of 19.3% from the summer peak.
Today, Cohen says the stock market has returned to “roughly fair value” with its rebound. She still describes the U.S. economy as “a supertanker. . . . It’s hard to knock off course.” And that should mean growing corporate profits next year and a rising market, she says.
How high? Her preliminary target for the Standard & Poor’s 500 index is 1,250 by next September, a 5.7% rise from here (not counting dividends). But Cohen says she will be revising that figure in the next few weeks, “and I think [the revision] will be higher.”
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* Jeffrey Applegate, investment strategist, Lehman Bros., New York: “The End of the World?” Applegate headlined a memo to clients on Sept. 11, when the Dow was at 7,795.
It was not, he insisted. “Given that policymakers in the United States and Europe aren’t asleep at the switch, and that some in Japan might even be stirring, we believe the markets will probably be cheered by some decent policy decisions in the months ahead,” he said--foreshadowing interest-rate cuts by U.S. and European central banks and Japan’s surprising steps to bail out its economy.
So Applegate confidently maintained his recommended portfolio allocation of 80% stocks and 20% bonds in September. That would have required clients to buy more stocks as the market sank and sell bonds as they rallied.
Clients who did so should be singing Applegate’s praises. He continues to be bullish about 1999. He projects the Dow will be at 9,800 by year-end 1999. Include dividends and that would be a total return exceeding 7%--which would be far better than staying in cash.
While the bears gripe about sky-high price-to-earnings ratios on blue-chip stocks, Applegate believes they are deserved--and that they can rise further. Stock prices reflect the backdrop, and the backdrop overall is simply great, he says. There’s low inflation, relatively low interest rates, good labor productivity, no more Cold War and a balanced federal budget.
Given all that, stocks should sell for historically high prices relative to earnings, he argues. “The stock market is a discount mechanism. Ergo, it should go on to discount a world that has never existed before,” Applegate says.
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* Richard Eakle, principal, Eakle Associates, Fair Haven, N.J.: Once a strategist at Morgan Stanley, Eakle now heads his own firm. In September and early October he was reminding clients that, historically, crises centered on fears over the health of leading financial institutions have usually denoted market bottoms--and thus, great buying opportunities.
He was right: The fear generated by the near-failure of the hedge fund Long-Term Capital Management in late September drove many financial stocks to extraordinary lows, at which points they were screaming buys. Merrill Lynch, for example, hit $35.75 at its low; it’s now at $78.06.
Today Eakle’s message remains bullish. Looking at technical market indicators, the surge in volatility in early fall, the Federal Reserve’s rate cuts and other factors, “I feel [this] recent confluence of rare but powerful signals is too compelling to ignore,” he says.
His target for the Dow: 11,720 by May 2000--a 26% gain over 17 months.
