How to keep Wall Street rising -- some experts' views
Wall Street this week has put together a heady mixture of optimism and money. Stocks have boomed and volume has exploded. However, stocks, like good bread, need the proper ingredients to rise over a longer period of time.
The best yeast to make a market rise, market analysts say, is a positive investor attitude. Monte Gordon, director of research at the Dreyfus Corporation , says the market's sharp upswing on Tuesday, when it soared 38.81 points, was a start toward improving investor psychology. ''I don't know if that one day did it all,'' says Mr. Gordon, ''but it was an important turning point.'' From a deep feeling of gloom and doom on Wall Street, he notes, investors found a ''stirring of hope.''
To sustain that hope over time, analysts say these ingredients are necessary to make stocks rise:
* Investor outlook. Through most of the year, investors have looked at most news only in terms of its negative implications. For example, Barton M. Biggs, managing director of investment strategy at Morgan Stanley & Co., told his firm's blue-chip clients recently that he stayed home one Friday this month to catch up on his reading.
Almost everything he read was negative: The banks were unprepared for the problems of the less developed countries; there was new weakness in European economies; and, a new book called President Reagan ''a transition figure'' in the trend toward final economic failure. The book predicted the decline of Western civilization. Mr. Biggs says he didn't find any good news, such as ''optimistic studies about growth and productivity because they aren't being written.''
What does all this negativism mean? He says it may mean the market is at or near a bottom since ''the bottom of the market has to be the point of maximum bearishness where the bear case is the most logical, most compelling, and is known by almost everyone.'' Thus, he concludes, ''I still think both stocks and bonds are going higher so there is bigger risk in being out (of the market) than in being in.''
Biggs's perception is beginning to catch on. Larry Wachtel, vice-president for research at Bache Halsey Stuart Shields, a brokerage house, says an informal survey of Bache's institutional salesmen on Aug. 19 revealed that institutions, such as pensions and bank trust departments, had begun to develop a greater inclination to buy stocks on dips in the market than to sell them. However, Mr. Wachtel adds, ''No one is proclaiming that this is a new bull market.''
* Interest rates. Falling interest rates are usually the locomotive that drives Wall Street. Thus, when Henry Kaufman, one of the chief inspectors of that locomotive, announced that he expected interest rates to drop in the future instead of increase, it helped spark the record 38 point rise in the Dow Jones industrial average.
Mr. Kaufman, a widely followed economist at Salomon Brothers, surprised many of his followers, who were accustomed to his bearish predictions on the future direction of interest rates.
However, other economists point out that short-term rates have been falling steadily for months. Now, the expectation is that long-term rates will follow. In the next six months, says economist Martha Seger, commissioner for financial institutions for the State of Michigan, long-term rates should weaken in line with the drop in short-term rates.
Ms. Seger says she expects short-term rates to decline further - perhaps as much as another 2 percent. The fall won't be nonstop, she says, but the trend is clear.
An increase in corporate profits will spark the fall in rates, she says. As businesses see their profits improve, she explains, they will borrow less from the banks and will be able to pay off their indebtness.
''This will be the trigger for allowing rates to fall further and not go back up as the economy recovers,'' she states.
* Corporate profits. Investors buy stocks when they expect corporate profits to rise. On Aug. 19, the Commerce Department reported corporate profits in the second quarter only fell 0.8 percent after taxes. In the first quarter they were down 20 percent. Ms. Seger says this shows corporations have now cut expenses to levels that keep red ink off their ledgers.
Still, security analysts are hacking away at earnings estimates. Once the hacking stops, investors will feel more confident in their predictions. The stock market's rally so far has centered on highly visible stocks, such as IBM and General Motors, where earnings estimates are easier to gauge than smaller, highly volatile technology-oriented companies. However, Mr. Kaufman of Salomon Brothers, in changing his interest-rate forecast, said the economy would be weaker than he expected. If he is right, corporations will have to remain lean for some time and profits may not rebound as quickly as some investors would like.
* Cash. Cash is the stock market's food. And, by almost any measure, the larders are full. According to James Bohan, vice-president at Merrill Lynch & Co. Inc., the firm recently conducted a survey of bank trust departments. It found that cash made up 16.9 percent of the deparments' total portfolios. At the end of July, mutual funds had a record 12.2 percent of their assets in cash. And , money market mutual funds were filled with $220 billion. Mr. Bohan says this level of cash is impressive. But he says Merrill Lynch expects cash levels could rise as high as 20 percent before the stock market turns up for good. Cash levels are high, he concludes, ''but not high enough to turn the market around in a sustained way.''
* Technical. Many investors count on charts to help them make decisions. Thus , the ''technicians'' who interpret the charts and market patterns are important. Wall Street technical analysts are pleased, but they are unconvinced that the market has bottomed out. Newton Zinder of E.F. Hutton comments that ''the back of the bear market has probably been broken.'' But, he adds, he is troubled that some of the technical factors he looks at have not quite fallen into place.
Bohan of Merrill Lynch agrees. ''We need more confirmation that the bear market is over,'' he states. He says its important that a strong rally continue for a couple of weeks - not just a few days.
* Confidence in Washington. When the market rallied on Tuesday, Secretary of the Treasury Donald T. Regan said President Reagan's economic program deserved some of the credit.
Some investors agree. Gordon of the Dreyfus Corporation, a mutual fund, says the main value of Mr. Reagan's tax bill is that ''it looks like fiscal discipline and can be interpreted as a step to fiscal stability.''
Already, says Ms. Seger, investors have regained confidence in the Federal Reserve Board.
''By hanging tough,'' she says, ''the Fed has improved its credibility with the big-buck types - the bankers and investment managers.'' Do all these ingredients add up to a recipe for a bull market? Answers Gordon, ''We have to see some sustainability and stability.''
And, most analysts agree, the next few weeks will be critical in determining if the stock market will once again reward investors.