Both bulls and bears link forecasts to the deficit

'Tis the season for goodwill - and forecasts. The former can only be welcomed, following a year that produced a seemingly endless and often acerbic election campaign. And the latter - prognostications - can also be welcomed as useful guideposts to the future. This year is proof of the risk in analytical speculation: The current brisk US economy is a far cry from the economic basket case many analysts were predicting for the United States after the October 1987 market plunge.

But the investment community - precisely because it deals with such long-range variables as currency adjustments and interest rates - must always look down the economic landscape as far as possible. And what investment managers and other key market players are seeing is, not surprisingly, as varied as the players themselves.

Opinions range from the bullish to the bearish, usually linked to the observer's expectations about what Washington will do, or will not do, about resolving the US budget deficit impasse.

``We don't see any quick solution for any of the basic problems facing the US,'' says Arnold Kaufman, editor of The Outlook, Standard & Poor's investment advisory newsletter. ``We don't see much coming on federal budget relief or on trade deficit reduction. And there could be problems in keeping overseas investment money flowing into the US.''

The upshot, Mr. Kaufman says, is that the market will continue its recent pattern of short ups and downs within a narrow trading range. But he says that by the end of next year, the market, as measured by the S&P 500 Index, could be 5 to 10 percent below the current S&P level of about 276.

For the week ended Dec. 16, the Dow Jones industrial average closed up 7.22 points, at 2,150.71.

Kaufman is concerned about the risk of recession next year. He sees high growth during the first quarter, perhaps in the 4 to 5 percent range (with part of that growth representing bookkeeping adjustments relating to this year's farm drought). But Kaufman also forecasts ``a rate of growth in the 1 percent range in each of the last three quarters during 1989.'' That means that there is precious little latitude for a mistake on the monetary or fiscal front if a recession is to be avoided, he says.

Kaufman believes that a number of key industries look good in terms of above-average appreciation, including pollution control, drugs, auto parts, regional banks, computer software, heavy trucks, and phone companies.

Also on the cautious-to-bearish side is Philip Goldsmith, a partner with the investment firm of Goldsmith & Harris, New York. ``We are very risk averse and cautious,'' Mr. Goldsmith says. ``We feel that we're reaching the later stages of a business cycle.'' He says that means ``we're putting our [portfolio] assets in arbitrage situations where there's a spread and we can get a return over the next several months.''

Goldsmith envisions a flat-to-down market in '89. He is particularly wary of cyclical stocks. He does like several chemical companies, however, including Great Lakes Chemical.

A slightly more middle-of-the-road assessment comes from Jack Casey, managing director of Scudder, Stevens & Clark. Mr. Casey sees what he calls a sideways trading pattern (in a relatively narrow range), stemming in part from interest rate pressures. But he sees one bright development on the horizon: a new awareness about the potentially adverse consequences of leveraged buyouts. These LBOs, of course, have been the main players in the market of late, with all their emphasis on ``shareholder value.'' And any lessening of this activity would be a short-term negative for the market. But at the same time, Mr. Casey holds that rising concerns about LBOs will be healthy in the long run, freeing up the market to look at companies based on longer-range considerations.

Casey has just written a book that will be out in February, ``Ethics in the Financial Marketplace'' (Scudder). He is particularly concerned with what he believes is the ethical or moral role of a director.

Casey believes that directors of a company, as well as the general public, are increasingly aware ``that American companies are not casino chips. A company is not just a number. It consists of employees, management, shareholders, and the public at large'' that buys its products or uses its services. Casey likens a company to a theater, where there is interaction between the actors and the audience. He says that in other words directors have a special responsibility. ``I don't believe a company has job preservation as its No. 1 priority. But a sell-off has to take into account the workers, the shareholders, and the community.''

``You can't re-create a company once it is broken up,'' Casey says.

James Kalil Sr., president of Compu-Val Investments Inc. in Wilmington, Del., is particularly upbeat about the market. ``I see the market going up 200 to 400 points during 1989,'' he says. ``That will reflect what's happening in the economy. The pressures on [President-elect George] Bush and the Congress to solve the budget deficit are tremendous. The Reagan administration saw no problem. I think Bush has come to realize it [the deficit] won't go away without some type of action.''

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