On '80s boom, defense cut, foreign outlook, Fed policy
Many brokerages, banks, and economic-research firms publish periodic newsletters on economic trends. As a service to readers, and without endorsing any particular views, the Monitor presents excerpts from some of these newsletters.
Unless the stock market degenerates unexpectedly, we think Reaganomics will not only do better than many now expect, but a boom lies just ahead that will be spearheaded by the automotive and construction industries. This is the time to buy a car and house, before the crowd arrives.
The coming economic upturn could last for years - incredible as it now sounds - possibly until 1989, but TDL (The Dines Letter) predicts that its most unusual and unexpected feature will be buying panics, especially in certain commodities such as copper, which could go from its present level of 72 cents to above $1.00 , above $1.50, and perhaps far higher.
-The Dines Letter, Belvedere, Calif.
The $8 billion cutback in the defense budget for 1984, announced by Defense Secretary Weinberger last week, would actually make little difference in real outlays. Much of the budget reduction consisted of using lower estimates of price increases for defense goods, lower costs for fuel, and a salary freeze for military personnel. No large weapons programs would be cut. The only reductions in real programs would result from delayed construction projects and canceled training exercises. So the bottom line is that defense outlays in constant dollars would still be 10 percent higher in fiscal 1984 than in fiscal 1983.
-Citibank, New York
In order to service their external debt repayment obligations, many non-oil developing countries will have to impose economic austerity - a move that may also affect US exports in 1983. Most of these countries have been major customers for US products for a number of years. For example, US exports to Mexico in 1980 amounted to about 7 percent of total US exports. Adding five other so-called ''high debt'' countries of Latin America - Argentina, Brazil, Chile, Peru, and Venezuela - boosts the total to 13.2 percent of total US exports in that year.
-Manufacturers Hanover Trust, New York
The great rally of 1982 was not confined to the US stock market. The two most widely watched markets off our shores are those in the United Kingdom and Tokyo. Stock prices in both of these nations have soared to new highs in recent weeks. While there is a lack of hard statistical evidence of the predictive ability of these indices vis-a-vis the US market, it is generally comforting to the bulls to see the worldwide scope of the strength in stock prices. When the international bull market becomes too extended, cracks will begin to show first in one market and then another. For now, though, the major non-US markets are strong, so there is no evidence that weakness abroad will extend to the domestic market. That is good news for the bulls.
-The Institute for Econometric Research,
Fort Lauderdale, Fla.
Except for a few tentative indicators such as housing and auto sales, the recovery remains wishful thinking. The odds, therefore, continue to favor one or two discount rate cuts this quarter. Given the current Fed operating strategy of keeping discount window borrowing at very low levels, cuts in the discount rate signal further accommodative monetary policy. The current strategy also means that short-term interest rates, particularly the federal funds rate, will remain quite stable relative to the volatility experienced in 1980 and 1981. When the Fed decides to change its policy course toward tightening, the first sign to the market will be a sustained higher level of borrowing from the discount window. The Federal funds rate will rise with a lag because banks, having refrained from borrowing for some time, will go to the Fed for temporary reserves when the Federal funds rate rises slightly above the discount rate.
-Wells Fargo Bank, San Francisco
The first leg of the market recovery cycle is now behind us. Stock prices have risen some 20 percent since January of last year and 35 percent from the market low of last August. The ''easy'' money has been made. It is reasonable to expect a consolidation-correction phase, possibly lasting into the spring of 1983. A major market setback is unlikely in view of continued investor liquidity allied to the perception of a 15 percent to 30 percent recovery in corporate profits. Many investors also perceive that the remainder of this decade will be very conducive to the ownership of stocks.
-Interstate Securities, Charlotte, N.C.
We would not be surprised to see this market keep rolling forward for a while. To venture a guess, the Dow Jones industrial average should try to advance into the 1100s, the New York Stock Exchange composite could push up toward 90 and the Value Line composite may try and make its way toward the 180 level. For the last week or two, market strength has been rotating towards the energy sector while money has flowed out of consumer-type stocks. This may be an opportunity to invest in the latter.
-Advest Inc., Hartford, Conn.