Out of step on Wall Street. The economy hums along, but the market won't dance

Almost 120 days after The Fall, people around the world are still holding their breath, waiting for clear signals. Economies are moving ahead while the world's stock markets remain somewhat uninviting places. Share prices are down greatly, light trading activity is locked in a narrow but sometimes volatile range, most markets have made little headway in recouping their losses, and new stock offerings are rare. Last week the Dow Jones industrial average closed at 1,910.48, down 47.74 points, in listless trading. The securities industry continues to retrench, with layoffs reaching the tens of thousands and departments closing.

Yet the United States economy is rolling along, with manufacturing operations close to full capacity and companies exporting their products and taking advantage of the lower-valued dollar.

In addition, while the index of leading indicators fell in December for its third straight month, some observers think this does not portend recession, but maybe an economic slowdown. Last week six big banks cut their prime rates from 8 percent to 8 percent, and interest rates have fallen since Oct. 19 in what may be an effort by the Federal Reserve to ease credit to prevent a recession.

Even the most experienced observers and managers are not quite sure what these economic and market signals mean. ``The stock market is a discounting mechanism - it's not necessarily in step with the economy,'' points out John Hickling, portfolio manager of Boston-based Fidelity Investment's International Growth and Income Fund. ``For the last five years you've had a booming stock market and uneven growth in the economy,'' which has primarily occurred on the East and West Coasts. Now the steel companies in the so-called rust belt of America have started to perk up.

``Everything is running at a high level,'' observes Perrin Long, of Lipper Analytical Services in New York. ``The economy is grudgingly moving forward. Yet capacity utilization is a thing of the past as we move toward a service economy, which we primarily are.''

What concerns Mr. Long is the news coming from American brokerage and financial service companies. ``No major US firm anticipates that its domestic revenues and profits will be higher in 1988 than they were in 1987,'' he says.

Furthermore, during the last three months, the average daily number of transactions in the securities industry was 21 percent lower than during the third quarter of 1987. ``They're processing fewer transactions. And when the average prices are lower, companies generate less revenues and profits get squeezed,'' Long says.

Despite the generally dreary view from Wall Street, some people see signals that the economy will remain strong. ``If you detach yourself from the world as seen from Wall Street, you'd see that the real economy is fairly buoyant,'' observes Gavin Dobson, a strategist at the Kemper International Fund, Chicago. ``If people took the train to Gary, Ind., they'd chirp up a bit.''

Mr. Dobson sees reasons for hope in the Gary steel mills that are working 24-hour shifts, purchasing agents filling orders, and an agricultural equipment business having its best year in five years.

``By no means are we universally bearish, and we don't subscribe to the apocalyptic view of the markets,'' Dobson says. ``People still have to eat, drink, and make telephone calls. You have to take demand to its most basic level,'' and look at individual companies around the world.

Dobson likes real estate and hotels in Hong Kong, mining companies in Australia, and the machine tooling companies in Japan. ``The industrial world is running at full capacity, so retooling is taking place,'' he explains. Because the US dollar is stabilizing and the machine tool companies have dollar earnings, their earnings will explode with the dollar's strength, Dobson says.

Mr. Hickling of Fidelity says the international fund is allocated among stocks in three areas: Japan, the United Kingdom, and the European continent, including Germany, France, and the Netherlands. In British stocks, Hickling says the fund has a ``good'' weighting.

In Japanese stocks, the fund has been underweighted, an allocation that Hickling says has hurt the fund because of that market's performance. ``The most surprising thing since the crash is that Japan has performed the best and was down the least during the crash,'' he says.

Industry sentiment before the markets fell Oct. 19 was that Japan would lead the world's markets down, because price-earnings ratios were considered astronomical at anywhere from 60 to 80 times earnings.

``What this shows is you can't look at Japan by Western analytical standards, or to quote the saying, `You can't put ketchup on sushi,''' Hickling says.

Among continental stocks, Germany and France have been awful, he adds, noting that Spain and Sweden have turned in good performances recently.

Dobson stays away from brokerage and banking stocks, but he does include some insurance companies in the Kemper portfolio. He also avoids domestic stocks as a matter of principle, particularly in France and Germany, but he does include some Japanese construction stocks, where there's a 15- or 20-year outlook.

``Our outlook is the same as before the fall. We've always been value oriented,'' Dobson notes. He advises investors to research carefully. ``And be patient; good valuations take time to emerge. You can't expect fireworks in the short term.''