Where Next for the Dow? Six Views on 6000
Corporate earnings are up, but analysts offer mixed forecasts for the stock market
| NEW YORK
After the Dow Jones industrial average roared through the 6000 point level on Columbus Day, the big question now being asked on Wall Street, is simple: Can this bull market, now six years old, continue into 1997?
Billions of dollars in potential market gains - or losses - are at stake. The consensus view seems to be "yes," the stock market is not about to plummet downward. But a minority view urges investors to be cautious, noting that the first two years after a presidential election can be lackluster at best, negative at worst.
What follows are interviews with six prominent securities analysts on what's driving the market these days and where it's headed.
Rao Chalasani, chief investment strategist, Everen Securities Inc., Chicago
"There's enough confidence out there now [among investors] to continue this rally," Mr. Chalasani says. "Earnings [gains] continue to come through."
The consumer-confidence element of the Dow is very important, he adds. The Dow comprises 30 blue-chip stocks. Several decades ago, most of the companies on the Dow were giant industrial firms in "smokestack" industries like autos and steel. Many remain. But the Dow now includes more consumer-oriented enterprises, such as McDonald's, Procter & Gamble, IBM, and Walt Disney, Chalasani notes. Thus, the continued upward movement of today's more consumer-oriented Dow represents a sort of indirect vote of confidence in the future economy on the part of individual Americans, he says.
Still, a crucial element to watch, Chalasani notes, is the outcome of November's presidential election. Most investment houses predict victory for President Clinton. But were he to carry a Democratic Congress into power, or were Republican challenger Bob Dole to be elected along with a Republican Congress, there could be an adverse impact on financial markets, including the interest-rate sensitive bond market.
"It's not a matter of Democrats being elected, or Republicans," says Chalasani. Wall Street currently "likes the idea of a divided government" as adding a check on excesses at both ends of Pennsylvania Avenue.
Chalasani says investors should select stocks on the basis of such fundamentals as potential earnings gains, exemplary management, and good cash flow.
Elaine Garzarelli, president, Garzarelli Capital, New York
The stock market is "overvalued and dangerous," Ms. Garzarelli says. Individual stocks are overvalued by at least 15 to 25 percent, she says. Thus, unless interest rates come down at least one percentage point, which she believes is unlikely, a market correction (downturn) cannot be ruled out. But markets seldom "correct" in the final months of a presidential election year, she says. That means that a downturn is "far more likely in 1997."
At the very least, she says, the Dow and other major stock indexes will either drop or remain in a tepid trading range.
Investors, she says, should "stay in cash and short-term bonds" until there's an "all-clear sign" for the market.
Peggy Farley, managing director, AMAS Securities Inc., New York
"Everything is in place for the bull market to continue right through 1996 and into next year," she says. The Federal Reserve, she says, is determined to ensure interest-rate stability; the presidential election is expected to produce political stability.
Looking abroad, economic growth is somewhat questionable in Europe, she says. Japan has not yet fully recovered from its economic downturn. Thus, overseas money will continue to flow into US financial markets. But the US bond market has been producing only tepid gains. The bottom line, she says, is that the US stock market continues to be where the action is, and will be.
Daniel Seto, senior economist, Nikko Securities Inc., New York
Stock market gains Monday "reflect a US economy that is much stronger in the second half of 1996 than had been anticipated in the first half of the year," he says; this underlying economic strength should continue to muscle stock prices upward.
Mr. Seto says US consumers are in far better shape than a number of recent media accounts have suggested. While it is true that bankruptcies have risen in the US, he says mortgage delinquency rates are quite low. "Wages are climbing for many workers, and jobs are plentiful." In fact, many companies "are now forced to pay premiums to attract workers, a sign of extraordinary economic strength."
But Seto believes the Fed is not in any hurry to so tighten rates - to prevent a potential resurgence of inflation - "as to curtail the [economic] expansion."
Seto expects fall/winter US retail sales to be quite good. The slowdown in retail spending in the third quarter he says, "was deliberate, with families putting off purchases until later in the year." More consumer spending will mean continued earnings gains for companies. And that, he says, will keep stock prices moving up.
Alfred Goldman, director of market analysis, A.G. Edwards & Sons, St. Louis
"We're still in a bull market, and anyone who predicts a top [to the market] is being very presumptuous," he says. "Investors are optimistic; bonds have been doing well lately; high-technology stocks are back in favor." Those factors support additional gains.
He sees some negatives, such as the fervent intensity of stock gains since the mid-July downturn. That type of sustained momentum sometimes suggests a herd mentality that may not be based on underlying fundamentals.
Still, Mr. Goldman sees no reason to doubt continued durability in the stock market. While the conventional view is that this bull market is now six years old, Goldman sees it as really "a two-year bull market," noting that in 1994, 70 percent of all stocks were down some 20 percent or more. "If that wasn't some type of correction, I don't know what you'd call it," he says.
Any correction would "probably occur because of something not expected. The snake we see is not the one that would bite." For now, he says, relax and enjoy the bull market.
Don Hays, director of investment strategy, Wheat First Butcher Singer, Richmond, Va.
The surge past 6000 points on the Dow on Oct. 14 "was a fluke," Mr. Hays says. "During holiday seasons, such as Columbus Day, trading volume tends to be low and traders play games," in terms of using diverse types of computer programs to make money. That, to a large extent, was what happened earlier this week, he believes.
"There's is nothing magical about the 6000 point mark on the Dow. The Dow and the Standard & Poor's Composite Index have pretty much achieved their potential gains this year." Most of the gains in the Dow have resulted from corporate mergers, acquisitions, and stock buybacks, he says; individual investors have basically stayed out of the stock market. But a lot of the corporate buying is now ending, he says; thus, Hays believes that there could be a market dip of 3 to 5 percent in the next few months.
Still, Hays believes the Fed will be cutting, not raising, interest rates by December to boost the economy; that would boost stock prices. He expects corporate earnings to be up about 11 percent in 1997, pushing share prices up at least that much. Growth stocks should do especially well next year, rising 30 percent to 40 percent, he predicts.