Investors pause for 7th-inning stretch

July has always been looked upon as a midpoint gauge in the calendar cycle. In sports, the baseball team out front on July 4th is usually considered the front-runner for the World Series - a momentary point of joy for Detroit Tigers fans in the American League, East, and some unhappiness for New Yorkers who follow the Yankees.

And on Wall Street, July marks the start of the third quarter and the second half of the tax year. So when analysts such as Abby Joseph Cohen of Drexel Burnham Lambert Group Inc. in New York believe there are sound reasons for the recent market rally - with continuing gains to be made - the financial community tends to take quick notice.

The present moment, Ms. Cohen says, is ``not the bottom of the ninth inning for the economy.''

And although some investors are leaving the ballpark after recent gains, not to mention those who have fled since the market crash last year, the view from Drexel is that it makes sense to stay in the investment bleachers a little longer.

The market, says Cohen, is now ``in a seventh inning stretch.''

Drexel Burnham Lambert, says Cohen, sees a period ahead for rising stock prices. Cohen expects a period of stability, or a mild rally, in the bond market. She also expects continuing stability in foreign-exchange markets, as well as only ``modest hikes'' in interest rates. The upshot, she argues, is that investors ``should be 95 percent'' invested in equities for the moment.

Irwin Kellner, chief economist of Manufacturers Hanover Trust Company here, does not rule out the possibility that the United States may now be in the beginning of a recession - certainly a ninth inning situation if there ever were one.

A recession, of course, could not help but have an adverse impact on the market.

``What we see so far is a sharp slowing in consumer spending and only a modest improvement in the trade deficit. Growth may have fallen sharply during the second quarter [which ended June 30], or disappeared altogether,'' says Mr. Kellner.

Final growth figures for the quarter will not be available until later this month. But Kellner notes that only two economic components have been strong lately, exports and spending on business equipment.

Four components, which make up one-half of the private economy, are down, he says: Consumer spending on hard goods and soft goods, new home sales, and certain categories of business spending. If growth were to slow appreciably, says Kellner, ``corporate profits could take it on the chin'' during the weeks ahead, as consumer spending drops off.

Most economists continue to discount any immediate recession. Cohen, of Drexel, for example, does not anticipate a recession until 1990, if then.

But at the least, somewhat slower growth may be in the offing. Last week the US Commerce Department reported that its index of leading economic indicators fell 0.1 percent in May. Lower stock prices contributed to the decline.

The Commerce Department also announced that sales of new single-family homes fell 0.3 percent during May, while factory orders registered their steepest decline in nine months.

New car sales, according to Kellner, are also dropping somewhat more sharply than many analysts had expected during the summer months.

The market, for its part, seems unclear as to exactly where the economy is going. Last week, the market closed down 11.38 points, at 2,131.58

Ralph Acampora, a technical analyst here with Kidder Peabody & Co., stands somewhat near Cohen of Drexel in believing that the market will start the second half of 1988 on a positive note. The first half of the year has certainly turned in a solid performance, with blue-chip indexes rising about 10 percent, and secondary indexes double that.

Mr. Acampora, however, cautions that the year could end on a sour note.

Looking at near-term conditions, Acampora believes that the summer rally will peak in the 2,200 range for the Dow, although, he says, ``I'd personally like to see it ratchet up a bit, into the 2,300 or 2,400 range.''

But as Acampora concluded in an article written jointly with fellow Kidder Peabody analyst Dennis Jarrett, the market could re-test the late 1987 lows later this year or in 1989, perhaps dropping to the 1,750 to 1,800 range.

That said, the two analysts believe that whatever happens this summer, the first half of 1989 will be a ``period of improvement from whatever lows are established in late 1988.''

Acampora believes that sector leadership in the second half of this year will be geared to ``late-cycle cyclicals,'' such as oils and metals, and traditional safe-haven equities.

Such ``safe'' issues would include electric utilities, regional Bell operating companies, money-center banks, and oil stocks. The strength and leadership within the market will tend to come from smaller secondary stocks, says Acampora, ``but blue chips could follow.''

Drexel Burnham Lambert, as Cohen notes, has been emphasizing stocks in three areas:

Stocks selling at a discount to private-market value.

Growth stocks selling at lower-than-usual price-earnings ratios.

Economically sensitive stocks. These would include stocks that gain from export trends.

Cohen questions whether smaller capitalization stocks are as attractive as they were earlier this year, given their strong performance since January. At the end of last year, the expected return of smaller stocks outpaced those of the larger stocks by a solid 35 points.

The differential now, she points out, ``is about 10 percent.''

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