Some bulls say it's time to buy stocks
It's bargain time for stocks. That's the view of Joseph J. McAlinden, vice-president of Argus Research Corporation. It's an opinion shared by quite a few other stock market analysts.
For instance, Wright Investors' Service says it is confident the 1980s "will be as rewarding for equity investors as the '70s were disappointing." And Lacy H. Hunt, an economist with the Fidelity Bank in Pennsylvania, though not making predictions, has made some calculations that lead him to conclude that stock prices of the cyclically sensitive non-oil companies have already discounted the current recession.
Of course, others have gloomier opinions. They believe the recession or world turmoil will drive stock prices lower. If everyone shared the optimistic viewpoint, stock prices would have already risen to a higher level.
In fact, there has been enough bullish sentiment around that stock prices in the United States turned in their best performance last year since 1976. A report by Interactive Data Corporation, Waltham, Mass., shows that despite a static fourth quarter, average share prices in 1979 rose 25.7 percent on the New York Stock Exchange, 42.2 percent on the American Stock Exchange, and 31.2 percent for NASDAQ (over-the-counter) industrials.
That meant that the total market value of common stocks on the Big Board and the Amex was up $140.03 billion, with more than two-thirds of listed issues sharing in the gain.
Looking at 1980, one major question is whether stock prices will plunge downward as the recession becomes more evident. Fidelity's Mr. Hunt notes: "Stock prices have declined significantly prior to and during the early stages of each of the postwar recessions. But the current experience appears contrary."
On a peak-to-trough basis, the Standard & Poor's 500 stock index (S&P) has declined by an average of 22.7 percent for the six recessions of the postwar period. The steepest decline, from January 1973 until December 1974, amounted to 43 percent. The smallest decline was 10 percent at the time of the mild recession of 1960-61.
Now, this index did decline from September through November, but only by 4.5 percent. It recovered somewhat in December before its recent spell of edginess over the trouble in Iran and Afghanistan. Such a decline would normally seem far too modest to suggest that a recession is in the offing, Mr. Hunt notes.
However, he goes on to break the market into two components. The prices of the domestic and international oil companies and the oil exploration and drilling companies have risen sharply -- up 40 percent just in November, compared with a year earlier. Obviously there are good reasons for such a price jump for these stocks. The price of the non-oil stocks has declined significantly.
"Our calculations show that the S&P, excluding oils, peaked at 96.03 in March 1976. In November 1979 this index was at 75.77, down 21 percent from its peak. This drop is consistent with the traditional cyclical experience of the S&P 500 ."
Mr. McAlinden, commenting on the market, writes: "The problems seem limitless: chaos in Iran, hikes in oil prices and curtailments of supply, persistent general price inflation, record- high interest rates, and the threat of imminent recession. Yet, looking ahead to the new year, the old 'buy on the bad news' adage seems more appropriate than ever. For stocks are in the process of re-establishing themselves as strong inflation hedges.
"And as the negative aspects of the Middle Eastern situation and of the business cycle pass -- or are fully discounted in the market -- share prices could rise spectacularly."
Mr. Mc.Alinden figures that stock market prices may not yet have fully digested the prospect of lower corporate profits as a result of the recession. Nonetheless, he maintains that the next bull market (prices going up for along period) should be under way before the middle of the year. Moreover, "given the favorable longer-run fundamentals," he projects a rise in the Dow Jones industrial average from its current 830 area to the 1200-1400 range by the early 1980s.
One such favorable fundamental seen by Mr. McAlinden is the growth in corporate dividends. These had historically grown at an average rate of 4 percent a year. That was not enough for stocks to compete with the returns on other assets, such as money-market instruments yielding well above 10 percent. Now business executives have adjusted dividends to the current high inflation rate by boosting the dividend growth rate to about 10 percent.
If that rate of growth is maintained -- and Mr. McAlinden believes it will be despite temporarily lower profits -- then stock prices should be able to keep up with inflation even if price-dividend ratios do not increase from the pattern of the past few years.
Many investors in stocks had a negative "real" rate of return in the 1970s. Prices in general rose faster than stock prices.
But Wright Investors' Service notes that this was exceptional, that in six of the last eight decades stock widely outperformed both bonds and US Treasury bills. The other exception was during the 1930s, when the great depression severely deflated the stock market.
In the past, however, stock market values have either paralleled or, after times of high inflation, eventually caught up with the growth of earnings and dividends. Wright says it expects that to happen once again.