More than a promising trade report needed to shift market into gear
The stock market got up off the mat last week for an oh-so-ginger rebound, as the market, measured by the Dow Jones industrial average, rose to the 2,100 range after floundering at about 2,050. For a day or two, some euphoric analysts were even talking about the beginnings of a rally that could last right into the end of the year. But to get any type of meaningful momentum going, says David Rolley, senior economist with Drexel Burnham Lambert, more - far more - is needed than just last week's favorable trade report.Skip to next paragraph
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The United States Commerce Department reported that the nation's trade deficit had dropped to $9.53 billion in July, the lowest monthly level since December 1984.
Largely because of that report, the market shot up 17.60 points on Wednesday, closing at 2,100.64.
Unfortunately, that pace could not be sustained, and the market dipped back into the 2,090 range by Thursday. For the week, the Dow industrials closed up 29.34 points, at 2,098.15.
``What the stock market has done [recently] is a reflection of a trading rally in the bond market,'' says Mr. Rolley. The bond market, he adds, has been ``in a good mood'' because of reports indicating a slowing economy, including slightly higher unemployment, and a decline in retail sales, in part because of the steepest drop in auto sales in 10 months.
``The stock market,'' Rolley says, ``has some running room.'' But for a genuine rally to take place, he says, at least two conditions must occur:
There must be proof ``of an additional easing of the economy,'' to put downward pressure on interest rates.
There must be clear evidence that efforts by oil-producing nations to shore up or increase oil prices have collapsed.
Oil prices were on a downward track by late last week, after shooting up the first part of the week. But of more importance, a crucial meeting of the price committee of the Organization of Petroleum Exporting Countries will take place at the end of this month.
Whatever happens in that meeting, at least one key producer, Iraq, has indicated that it will not reduce its current output. That will substantially aid in holding down prices. Iraq produces 2.7 million barrels of oil a day.
``The market is currently running on neutral,'' says Paul Simmonds, research manager of the Institute for Econometric Research in Fort Lauderdale, Fla. The institute publishes Market Logic, a newsletter.
``To get the market going again,'' Mr. Simmonds says, ``you will have to have not only higher corporate earnings, but also lower interest rates.''
Yet, he adds, there are some real impediments in the wings - among them, continued White House/congressional inaction on reducing the US budget deficit and a lack of specific recommendations from the two presidential candidates as to how their new administration would reduce that deficit.
Then, he says, there is the ``ghost of Oct. 19,'' referring to last year's market crash. Simmonds is concerned that a spate of newspaper articles will be appearing in the weeks ahead which may in part add some new apprehensions to smaller investors who might otherwise be induced into returning to the market.
Simmonds does not see the market moving much out of a trading range of 1,900 to 2,250 points. Indeed, much of the trading activity of late has been concentrated on the retail sector, with, for example, Ames Department Stores Inc. agreeing to acquire Zayre Corporation's troubled discount-store division.
Rolley of Drexel Burnham adds that it will take some effort to get the market going again. Drexel recently released a poll of 327 key institutional investment managers, which suggests that stock sentiment has become more pessimistic.
The percentage of those managers who are bearish rose to 48 in August, roughly the same as in January, when 48.2 percent were counted as bearish. The January bearish level was the highest since Drexel began making such surveys back in 1983.
The investment managers also felt that inflation, certainly in the long run, will not accelerate, although it will do so in the short run. A majority of the portfolio managers concluded that George Bush, not Michael Dukakis, will be elected president in November.