Shrugging off a '74-75 echo, investors see turn in news
After last week's economics news, a lot of investors are wondering if they're undergoing what the French deja vu, or a flashback, to the recession of 1974-75.
After all, unemployment jumped to 7 percent, the index of leading economic indicators took its worst drop in 5 1/2 years, and car sales and construction outlays plummeted.
To Wall Street, the gloom and doom wasn't all that bad, since many investors began to expect that the bad news might be over soon. In fact, according to Arnold Moskowitx, an economist and vice-president at Dean Witter Reynolds Inc., many investor are now expecting that the worst new will be in this quarter. Thus, the Dow Jones industrial average managed to hold its own most of last week , eking out a gain of 7.34 points and closing at 810.92. volume was relatively lights.
Mr. Moskowitz, however, is not so sure that investors should be so confident that the recession is going to over by year-end. instead, he say he believes a long recession is in store.
"The recesssion should last from five to six quarters," he predicts, "instead of the three to four quarters that an average recession lasts." He also believes this recession is different from the one in 1974-75, since it is consumer-oriented rather than business-oriented. "The consumer cuts his spending more judiciously," he explains, "whereas business cuts spending completely across the board."
Mr. Moskowitz figures that if he is correct that the recession will last into 1981, then corporate profits will decline as well. "The stock market has not discounted this prospect yet," he concludes, "but it might be premature to expect the market to go down again soon, since so many institutions are loaded with cash and ready to invest it on any sign of market weakeness."
In fact, the conventional wisdom on the Street now is that the bottom of the market will be in June, since that would be three months after interest rates had peaked.
Morgan Guarantly Trust Company, in its most recent monthly economics analysis of the economy, says it believes it is still too early to gauge the severity of the recession. The big bank notes that there will be a lot of economic crosscurrents at work, including the huge tax refunds that US households are receiving; an increase in social security benefits in June; and the difficulties the international banking community is expecting in coping with OPEC's $100 billion current-account surplus. Still, the bank concludes there is about a 30 percent possibility that the recession will be as severe as 1974-75.
This week the government will report on retail sales for April and the April producer- price index. Rumors persisted on the stock exchanges that the index would show the lowest infalation figures in months. In fact, President Carter suggested on Thursday that his administration had "turned the corner " in fighting inflation.
The bond markets took notice of these rumors and official pronouncements and continued their rally.Interest rates dropped another 1 1/2 percent for many government securities, and some long-term government bonds fell to less than a 10 percent yield. At the same time, the prime interest rate, the rate at which banks lend money to their best customers, fell to 18 1/2 percent, down from 19 1 /2 percent the previous weeek.
In the market last week, silver stocks were lower as reports surfaced that the government was insisting that the Hunt brother of Texas sell their silver hoard. Silver prices on the commodities markets fell, followed by the stocks of companies that mine silver, as traders considered the prospects of the Hunts' dropping 100 million ounces of silver on the market.
The oil stocks were weaker last week but the airlines, banks, and textiles were stronger.