Investors watch Washington for signs the economy has eased up
Most eyes on Wall Street this week will be peering at the news tickers that carry the latest data from Washington on retail sales, consumer installment credit, the producer price index, and industrial production.
From those data should emerge a picture of the speed at which the economy is moving. The hope of most investors is that the picture will show a significantly slower economy going into the last month of 1984's second quarter.
That would be good news, because it would ease some of the public and private sector pressure that has been squeezing credit and causing interest rates to increase. Stabilization of interest rates at their present level - or, ideally, a decline in the rates - might have the following impact:
* It would hearten the bond market and make investors more eager to snap up the 13- to 14-percent interest rates they can get on bonds that are already on the market.
* That, in turn, would buoy the stock market, since the returns on stocks would not be so outclassed by the returns on bonds.
* There would be macroeconomic benefit also - especially for any consumer, business, or nation that has a floating-rate loan. Third-world debt conditions would at least not be growing worse. That would be good for banks that are carrying those loans on their books. Homeowners with adjustable-rate mortgages would worry less about not getting socked with heftier payments.
If all this comes about without a reignition of high inflation, then morale in the business community, at the consumer level - and no doubt in the Reagan administration as well - will be high.
An encouraging sign was that the nation's basic money supply fell $2.4 billion in the latest week. But other data still signal that a strong economy may prompt further monetary tightening by the Federal Reserve. The international debt problem and shakiness in the US banking system, however, have caught the Fed between a rock and a hard place: Tighter money supply may slow down the economy and keep inflation moderate, but that would hurt debtors abroad and cause problems for the banks.
Given that dilemma, many economists believe the Fed will have to opt for looser money - and that should prompt a drop in interest rates. One research firm, New York's Argus Corporation, sees this as foreshadowing a turn in the market and has been recommending a fully invested position, especially in blue chip stocks.
E. F. Hutton's chief technical analyst, Newton Zinder, agrees there is a direct linkage among the stock market, the bond market, the pace of the economy, and interest rates. He sees signs that the economy is already slowing in the drop in housing sales and in statistics indicating a decrease in the US workweek in May.
As of this writing, however, Wall Street was not singularly optimistic. The Dow Jones industrial average rallied up from the 1,100 range last week, but it had trouble going much beyond 1,130. That still leaves a big climb if the market is to recover much of the loss it has experienced since it began falling in the first week of January. The Dow closed Friday at 1,131.25, up 6.90 points for the week.
As to investor sentiment, Merrill Lynch chief analyst Robert Farrell observes: ''We are at the other end of the pendulum swing from where we were a year ago. Most of the market is still asking how far down rather than up the market will go.'' Mr. Farrell says the sentiment of bond traders has been ''as negative as it has been in three or four years.''
That leads him to think a market recovery will develop: ''We may actually be at the bottom (of the bond market) now.'' He expects the stock market to rally on such news. But that rally will probably not last long, he feels. By fall, the market may slip again as investors try to discern the fate of corporate profits in '85 and the economic ramifications of the November election.
Farrell's recommendation to institutional investors is to take advantage of the ''unprecedented'' interest rates that can be achieved with bonds such as Treasury Investment Growth Recepits. A TIGR is a certificate sold by a brokerage house that carries the right to a US Treasury bond. The bond is discounted and no coupons are paid. These appeal to pension funds, individual retirement accounts, and other institutions that do not have to pay tax on the interest the TIGR achieves.
''Nontaxed (pension or IRA) funds that can lock in 13-14 percent interest for 10 years or so really can't do better than this,'' Farrell says.
He believes that, moving into 1985 and '86, the stocks that will do best will be in the capital goods area. He bases this on his analysis of the '82-'83 bull market. That was led by consumer stocks, he says, and was prompted by consumers jumping out of real estate and other such investments because of the recession.
Now, Farrell feels, consumer ''liquidity'' is decreasing. Capital goods stocks - especially those of conglomerates - stand to move ahead next, he says, ''though it is probably early for them to emerge.''
Mr. Zinder of E. F. Hutton sees currently strong stocks as those that appeal to conservative investors. These include foods and beverages, printing and publishing, utilities (''those not tarred by the nuclear brush''), and chemicals. But, Zinder adds, ''it will take a better economic environment for these to do better.''