Economic boom echoes in world financial capitals
The big stock markets of the world, paced by New York's Wall Street, are booming. A global economic boom may not be far behind. Strong performances on the stock markets of Western Europe, the Far East, and the United States signal growing confidence among investors in the world's free-enterprise economies. This confidence may foreshadow a long-awaited global economic recovery in 1984, because investor sentiment usually precedes a major economic change, just as investors' capital helps that change to take place.
Such was the case in the US when the stock market surged in August 1982. Economic indicators still showed the country in a recession, but by November the recession had ended.
Overseas, the stock exchanges of London, Frankfurt, Brussels, Amsterdam, Zurich, Tokyo, and Hong Kong shot up last week. Even in Paris, under socialist rule, the market improved.
Specialists say that this activity has been due to a growing belief that the US economic recovery will soon become a world recovery.
Recent government forecasts in Japan, West Germany, France, Britain, and Italy have been significantly more optimistic than they were as recently as last autumn. Economic growth is expected to be faster, trade to increase, and inflation to remain stable.
''The European economies are at least a year behind the US,'' notes Martin Pomp, economist and director of international research for the New York and Foreign Securities Corporation, which specializes in international stock transactions. ''But now there's substantially better liquidity in Europe and Japan, low inflation, and no real spectre of inflation.''
In this country, the widely followed Dow Jones industrial average (DJIA) reached 1,286.64 last Friday, up 28 points for the week, and just below the record high of 1,287.20 set Nov. 29. The Dow transportation index was up near its record also. This was a good sign to stock market analysts, who hold that stronger industrial stocks must be ''confirmed'' by stronger transportation stocks, because production and delivery are integrally linked.
Volume on the New York Stock Exchange was extremely heavy, hitting a 191-year high last Thursday.
This reflected activity by institutional investors, such as mutual funds and pension funds, who buy and sell large blocs. Twice as many shares have advanced as declined.
Wall Street analysts say that the US stock market rally is being brought about by the resilient US economy, which continues to operate in an environment of falling unemployment, modest inflation, stable interest rates (perhaps soon declining), and strong corporate earnings. This is bringing the cash of institutions back into the stock market.
''It has been an institutionally fueled rally,'' says Newton Zinder, research director of the E. F. Hutton brokerage firm of New York.
Most analysts agree that the DJIA will not gain as much ground this time, nor move as quickly. They expect bursts such as last week to be followed by periods of consolidation.
Lee Idleman, research director of Dean Witter Reynolds, notes that the institutional cash behind last week's boom is a much shallower pool than existed at the time of the August 1982 boom. Consequently, during consolidations he expects portfolio managers to ''shift their asset allocations'' by dumping mediocre stocks and bonds and channeling the money into currently attractive issues like blue chips.
Corporate earnings will be the key.
''Investors have made a significant shift,'' says William LeFevre of Purcell, Graham & Co. Inc., ''from concern over interest rates to the fundamentals like earnings.''
Corporate earnings, Mr. LeFevre says, should increase 25-30 percent during 1984.
''The No. 1 reason for the strength,'' concurs Mr. Zinder, ''is the earnings outlook. The quality of earnings is so much better. They are not being swelled by inflation or inventory profits. A better stock market will pay more for better-quality earnings.''
Many Wall Street hands believe the bull market that began in August 1982 is entering its ''second leg.'' Since last summer, most equities - especially the more speculative high-tech stocks - have performed poorly. As the year closed, institutions sold a number more for tax purposes.
But in recent days, institutional and individual investors apparently have sensed that common stocks remain the best place to invest.
''At a time of low inflation and financial stability,'' says Mr. Zinder, ''hard assets such as real estate and gold cannot compete with stock.''
Mr. Idleman adds that bonds, the primary competition to stocks, also fare poorly at such times, because they offer ''high but flat rates that give you back only what is on the coupon.''
Stocks, he notes, represent shares in the growth of American business. If business is profitable (he projects a 28 percent increase in corporate profits in 1984), then dividends are high and price appreciation occurs.
The Dow Jones industrials, Mr. Idleman observes, have risen 500 points in the past 17 months, and he says he believes they have another 200 points left before peaking: ''It will be a grinding, harder advance, not nearly as exciting as the first 500, and it should be done pretty well in the second and third quarters (of 1984).''
But overseas, the boom is just beginning. Mr. Pomp, the international specialist with the New York and Foreign Securities Corporation, cites the presence of more ''liquidity'' in Europe and the Far East as the main reason for this. He notes that circumstances vary from country to country.
He is most optimistic about Japan, where he sees overall liquidity as being expansive without high inflation.
The British economy is strong and inflation there is low, Mr. Pomp says. In West Germany the expansion is only beginning, fueled by a rapid increase in the money supply.
In its latest projections for 1984-85, the Paris-based Organization for Economic Cooperation and Development (OECD) foresees strong overall growth in the economies of the world's 24 biggest non-communist countries. Real income of OECD members is expected to rise 3.5 percent this year, compared to 2.2 percent in 1983. Most of that jump, however, is expected to come from the US and Japan. Inflation should decline in Europe and remain at low levels in the US and Japan through mid-1985. The OECD says trade balances will improve for virtually all countries except the US.
''Financial assets have a good name again in the world,'' Mr. Pomp says. ''The collapse of gold has really been surprising. The outlook for corporate profits through next year is good. So, overall, there's room for expansion in Europe.''