Waiting for spring on Wall Street. Economy is warming, but investors, like daffodils, emerge slowly
Boston — Abby Joseph Cohen is still waiting for spring in New York, although she's ``certain it's on the way.'' The spring Ms. Cohen is referring to is not the spring of the calendar, which officially arrived March 20 - or even a meteorological spring, although she notes that ``it did snow'' over a week ago. Cohen, who is a first vice-president of Drexel Burnham Lambert, is awaiting a spring for Wall Street - the melting of concerns that have held back so many investors since the market plunge last October.
``Investors remain very cautious about the market, although our own perception is bullish,'' says Cohen. But slowly, gradually - like the coming of the seasonal spring of the calendar - perceptions are altering within the investment community, she says. There has been a ``change in the debate. After Oct. 19 the question was: How bad is the recession going to be?'' Now, she says, the debate looks different: ``The issue now is, is the economy too good? How strong will growth be and when will that lead to higher inflation, which could eventually cause recession?''
Indeed, the increasing view among economists is that of underlying strength in the US economy. This view was buttressed last week by the Commerce Department's second upward revision in the gross national product for the fourth quarter of 1987. The department said GNP rose at an inflation-adjusted 4.8 percent annual rate. And despite fears about inflation, consumer prices rose a modest 0.2 in February, according to the Labor Department.
Still, the higher growth figures - prompting mounting concerns about inflation and perceptions that stocks are now too expensive - held the market back. Last week, the Dow Jones industrial average closed down 108.42 points at 1,978.95.
Trading volume on the Big Board was noticeably tepid, reflecting investor caution about equities as well as weakness in the bond market stemming from inflation fears.
Cohen, for her part, can understand why investors are skittish. ``This [upward] economic cycle has been going on a long time,'' she says. ``That makes people nervous.'' And after Oct. 19, she says, ``many people said it was time to get out of the market. But we [at Drexel Burnham Lambert] said it was time to get back in.'' If there is a current bull market - which she believes is the case - ``it began Oct. 20,'' she says. She thinks the market will continue to advance, heading up into the 2,400-to-2,500 range.
So why isn't that now happening? Cohen says, ``There is a wall of worry that investors are reluctant to climb - an unwillingness to take a look at the underlying good news.''
The underlying numbers, argues Douglas Cliggot, senior economist with Merrill Lynch Economics, New York, are basically solid. ``The economy,'' he says, is ``a bit stronger than we expected it to be at this stage.'' Inflation, he says, is moderate; industrial production is growing; the United States is increasing its exports; the business equipment sector is doing well; the unemployment rate has continued to drop and remains stable.
``What we really need to see now,'' Mr. Cliggot says, ``is a continued softness in consumer activity'' to help mitigate inflation and allow more savings to be invested in the manufacturing sector.
The underlying factor that will propel the market during the months ahead, says Cohen, will be the ``increased strength in industrial production.'' She expects substantial increases in capital spending as well as continued growth in US exports. And company earnings reports, which will start to come out in the next few weeks, will be far better than some analysts expect, she says.
Cohen says, ``Investors are looking for values.'' Selectivity is the key: Many investors, for example, are actively seeking out secondaries - smaller companies that were unfairly caught up in the bashing of Oct. 19.
Indeed, the current market could well be characterized as a secondary- and takeover-market. Many secondary issues, particularly those linked to industrial production, as well as takeover stocks, continue to rise above their Aug. 25 level, when the Dow peaked last year at 2,722. James Stack, publisher of InvesTech, an advisory letter, sees this as ``a relatively safe market for secondary stocks,'' which he believes are undervalued.
Based on an evaluation of presidential election years going back to 1888, Mr. Stack, who is based in Whitefish, Mont., reckons that the market will reach about 2,285 before the end of the year. ``The odds of reaching 2,400,'' he insists, ``are very low.'' The current election-market euphoria, he maintains, overlooks justified concerns about blue chip stocks, which he considers overvalued by historical measurements.
Stack notes that the 30 issues that make up the Dow Jones industrial average recently traded at a total price of about 18 times earnings. But the historical norm, he notes, would be 13.8, which means the Dow average would be 1,547. Similarly, using another yardstick - the ratio of price to book value - he says, also suggests that blue chips are overpriced.
Still, Richard Eakle, vice-president of Morgan Stanley & Co., New York, believes that we are now at the beginning of a new upward cycle. When the market fell last October, he says, ``it was just a matter of time before the healing process began.'' He believes that has now happened. Thus, Mr. Eakle expects the market to head toward 2,500 by midyear.
Among reasons he sees for momentum:
The broad market continues to look good. Eakle notes that the Dow has continued to lag behind other indexes. Since Dec. 4, he points out, the Dow and S&P 500 are up 4.9 percent and 7.2 percent, respectively. The much broader Value Line composite, by contrast, climbed 27.4 percent. The NASDAQ composite climbed 28.1 percent.
Also, Eakle contends, ``the number of issues on the New York Stock Exchange making new highs continues to expand.''
Mr. Stack of InvesTech, out in Montana - where spring may seem slightly slower in advancing than on the Eastern Seaboard - remains more cautious. He says he is particularly concerned about the ``difficult choices the next president will have to make to reduce the US budget deficit,'' and the impact those choices will have on the market. When it comes to blue chips in particular, he says, ``This is hardly a time to put all of your eggs in one basket for five years.''