Bad news often makes good reading on Wall Street. This was the case last week when it became apparent the economy was continuing in a "free fall." Frank Mastrapasqua, an economist with L.F. Rothschild, Uterberg, Towbin, noted, "It's now apparent the recession is deepening and widening. It has some characteristics that make it look worse than the 1973-74 recession, but others that are not as bad."
Some of the negatives last week included signs that inventories were accumulating faster than business would like; another oil price increase by OPEC: reports that Chrysler Corporation was not paying its suppliers; and a government report saying retail sales fell 1.5 percent last month.
Despite these bad economic tidings, the Dow Jones industrial average posted a gain of 14.93 points, closing at 876.45, its highest level in more than 3 1/2 months. Volume remained moderately active.
One of the reasons investors last week were not intimidated by the headlines, Mr. Mastrapasqua says, is that they are beginning to expect that the recovery in 1981 will not be slow and anemic as orginally thought, but "moderately vigorous." Thus, price-to-earnings multiples could expand, he believes. This makes him conclude that "this is the year of bonds and stocks. I remain constructive (positive), even though the economic down-turn will be pretty severe." rate to an annualized 5 to 8 percent in the consumer price index. "A slowing in the rate of increase in the price of energy, the decline in interest rates, and reasonable stability in farm prices should all contribute to a temporary abatement in the inflation rate," he predicts.
On the financial front, Mr. Kaufman says, there will also be an improvement as banks find corporations paying off short-term loans, adding liquidity to the banking system. This in turn will encourage the banks to lower their prime rates. In fact, this happened last week as the prime rate again fell.
After months if not years of telling Wall Street that interest rates had nowhere to go but up, Henry Kaufman, senior partner and economist at Salomon Brothers, has changed his tune. Mr. Kaufman now states: "Interest rates will continue their unprecedented decline in the months immediately ahead."
He bases his forecast on various economic, financial, and monetary factors. First, he notes, the economy continues in a "sharp tailspin," which he expects will continue through the summer. This economic decline will temporarily pull down the inflation this time to 12 1/2 percent, from 13 percent. He predicts it will be 10 percent by the summer's end.
Now that the primaries are over, Citibank has tried to figure out what the economic scenario is likely to be depending on whether Ronald Reagan, John B. Anderson, or Jimmy Carter wins the election in the fall. In its latest economic newsletter the bank notes that the candidates have chosen to remain silent on their prospective monetary policy. It concludes that no matter who is elected, he will accord inflation fighting "a higher priority" than in the past, and anxiety about high unemployment will abate.