In the next two weeks the government will raise about $12 billion in the credit markets. Faced with this investment competition and enticed by record interest rates, investors last week took their money out of the stock market for the sixth consecutive week. The Dow Jones industrial average dropped another 26.50 points where it closed at 785.15. In the beginning of February the Dow was nudging the 900 mark.
Now, predicts analyst Wayne Norberg of Prescott, Ball & Turben, he wouldn't be surprised to see the Dow sink to the low 700s. "It won't be a real collapse, but we will sink to new lows," he says.
Bache Halsey Stuart Shields analyst Larry Wachtel also thinks the market is in for a some more sliding. "Once we crack 780, we will reach a catharsis area where a big drop clears the air." he comments, After the fall, characterized by an "emotional selling wave," Mr. Wachtel envisions a new phase in the market. In this phase, he states, there will be a renewed interest in such stocks as Avon Corporation, 3M Corporation, and some of the beaten-down blue chip and computer stocks.
However, Donald Reagan, chairman of Merrill Lynch & Co., said he was convinced the market was in the process of "basing." Once stocks reached their bottom levels, he thinks investors will "look across the valley" at the economic rebound that is sure to follow any recession. Like Mr. Wachtel, he thinks the leadership will be in the blue chips and other stocks that have not participated in the market's rise over the past year.
Adding to investor concerns last week, says Mr. Norberg, was the realization that the Carter administration's anti-inflation measures would not work right away. Instead, says the analyst, "we will have a period of tight money and high inflation resulting in a credit squeeze that should persist into early summer."
Mr. Wachtel also notes that Wall Street is looking at "the worst of all possible worlds." This includes a 19 percent prime interest rate -- with the likelihood that it will go higher -- and the fact that the "yield gap," that is, the difference between the yield in long-term bond market are now looking at bonds again.
These institutional investors should also have plenty of opportunity to park their funds temporarily.With the government's announcement that it intends to raise some $12.2 billion in new cash over the next two weeks, the investment options have grown. One of the reasons the Treasury is increasing its new offerings is because of the large number of redemptions of savings bonds and also because of redemptions of nonmarketable securities by foreign central banks who are selling dollars to support their own currencies. Recently, the dollar has been strong and the price of gold weak.
The President's anti-inflation program received more scrutiny on Wall Street last week, and many economists evaluated the programs in a negative manner. Henry Kaufman, partner at Salomon Brothers, noted that the new effort under way in Congress to balance the 1981 budget "should not be construed as providing immediate relief to the credit markets or as a landmark in fiscal wisdom." Mr. Kaufman also predicted that bank profits would be squeezed, adding, "if this is sustained long enough, [it] will dampen credit growth," one of the goals of the Federal Reserve Board. In the final analysis, the Salomon Brothers partner notes, "the unanswered question is whether the Fed will ease in the aftermath of these new measures as it did following the announcement last October."
At this point, says Eileen Spinner of Smith Barney, Harris, Upham & Co. Inc., it looks as if the Fed means business. She notes that interest rates rose last week at the major banks because of the new tighter reserve requirements in spite of a drop in the banks' cost of borrowing money on the open market. However, because of the Fed's new reserve requirements, the banks find their profit margins under pressure -- forcing them to raise rates.
Economist Walter Hoadley of the Bank of America agrees that the Fed must show "real perserverence" in pursuing its policies or inflation and interest rates will jump to the middle 20s.
"This will be the real test, of whether or not the US is over the hill in a fundamental sense," says the economist. Mr. Hoadley would like the government to focus on the "root causes" of inflation in order to solve the problem. This includes stimulating the "supply side" of the equation through the use of tax cuts. However, Fed chairman Paul Volcker said tax incentatives to increase productivity and supply probably will have to wait for the budget-balancing act to end in Washington.
In the market last week, the oil stocks lost much of their glamour. Texaco, testing its well off New Jersey, was down, as was Mobil, which had been strong on the basis of its oil find off Newfoundland. Mr. Wachtel described this weakness in the oil stocks as "positive" since it would allow other stocks to take the leadership role in the market.