A look at how financial analysts cope with market turbulence
If you were charting the stock market, would you put it just below the peak? Just beyond? Perhaps there'd be no peak at all -- more like a foothill on the way to a bigger mountain. In making investment decisions today, determining where we are in the business, stock-market, and economic cycles is crucial. If the US economy is peaking, you see, it might be time to move into defensive stocks, or get out of the market altogether. But if this is a pause, it could be an excellent time to snap up bargains.
One thing is certain: The economy and the stock market are not scorching any earth. High-tech -- that once-magical word on Wall Street -- has led a general retreat. Lower earnings projections at IBM dragged down the market at midweek. It recovered somewhat Friday, closing at 1,300.96, down 15.46 for the week. Weakening interest rates appear to encouraging investors now; many think the Fed will cut the discount rate soon.
Even if you don't hold with cyclical theory, so many people believe in it that understanding the ``conventional wisdom'' alone can be instructive.
A widespread belief that, say, the US economy is nearing a recession can become a self-fulfilling prophecy: If enough people see a recession coming, they take steps to hedge against that recession; money flows out of venture channels and into safe havens. That hastens the recession.
The same is true on a global financial scale, where the dollar and other currencies tend to reflect economic thinking. The dollar has been very strong, but many financiers see softer US interest rates and a slowing economy, and think the dollar may drop. As a result, they put off decisions to buy US goods now, hoping to buy them cheaper when the dollar falls. That slows the US economy even more.
In corporate America, you can find the same kind of fear of the future. IBM projects a not-so-great second half of '85. The stock skids and many other technology stocks skid, too: Wang, Digital Equipment, Hewlett-Packard, Data General, and so on. The widespread perception is that high-tech is in trouble, even if (as the article on Page 22 points out) the trouble is neither unexpected nor cataclysmic.
Perception and reality get mixed up.
And what better place than the famous city of image and rhetoric, Washington, to try to determine what the perception of the economy, the business cycle, and the market are? It was here last week that the Financial Analysts Federation, an organization made up of the key market-watchers and portfolio managers in the United States, heard speaker after speaker trot out the latest variant of ``we live in uncertain times.''
The trade deficit, the dollar, the budget deficit, tax reform -- there is no shortage of topics.
Interestingly, most of these savants think the Federal Reserve and White House will do their utmost to prevent a recession. The Fed -- because less developed countries would be dragged down in the recession and that would jeopardize world financial stability; the White House -- because ``supply side'' theory requires continued growth to decrease the deficit.
Economist Peter L. Bernstein describes this as a period of low growth and low inflation worldwide. It is unsettling, he says, because the economy continually teeters on the edge of recession.
Leon Cooperman, head of research at Goldman, Sachs & Co., does not see a recession in the next 12 months, though he concedes that with the federal budget debate, strong dollar, and Reagan tax-reform campaign, ``there is a greater possibility than normal that forecasts could be wrong.'' He thinks economic growth will accelerate in the second half of '85. Nor does Mr. Cooperman think the stock market peak has passed. Though there may be down days, he says, ``a 10- to 15-point change more often than not will have a plus sign on it.''
Nevertheless, Mr. Cooperman sees the market cycle as well advanced. ``We're really in the eighth inning of a ball game, not the third.'' The market will do fairly well into 1986, he says, but there will be gradual erosion.
Consultant Charles D. Ellis of Greenwich Associates sees international diversification as a way of ``putting less emphasis on the US business cycle.'' But this requires a close watch on Washington policy that bears on global trade.
Lawrence Stevens, vice-president of Vickers da Costa, notes that a pickup in US inflation can be offset by investments in economies like Singapore, Hong Kong, and Australia, which benefit when commodity prices rise.
So if there is a common theme among financial analysts today it is that the market cycle is well advanced, that Washington holds the key to how much farther the cycle can be extended, and that hedging internationally may be sound policy. Chart: Interest Rates. *Yields; Source: Bank of Boston.
Percent Prime rate 10.00 Discount rate 7.50 Federal funds 7.38 3-mo. Treasury bills 9.90 6-mo. Treasury bills 10.40 7-yr. Treasury notes 13.80* 30-yr. Treasury bonds 13.65*