Good economic news puts Wall Street in an expectant mood
The United States economy appears at last to be moving out of its summer of discontent. Wall Street seems fairly encouraged. The Dow Jones industrial average closed Friday at 1,2xx.xx, up xx.xx points for the week.
Still, some indecision was apparent late in the week. Several market-watchers say that at its current level the market might be susceptible to a modest drop (a ``correction'') or a period of sideways movement.
But that would only serve to build a stronger base for a big move up in the last half of the year, they say.
Here are some promising signs:
The latest economic data from Washington calm many fears that the economy might slip into a recession. The index of leading indicators registered its first gain (1 percent) since January. Data on factory orders also showed a strong increase. Unemployment stayed the same -- 7.3 percent -- but at least manufacturing jobs did not show another big loss. Those reports indicate better days ahead for basic industry and secondary stocks.
It's more likely now that oil prices will fall. Saudi Arabia indicated last week it will double production, reaching its allotted OPEC quota. That's good for transportation stocks (airlines, freight-haulers) and utility companies, although it hurts US oil companies.
There's finally a fiscal 1986 federal budget compromise, and at least it makes an effort to keep the deficit down. That should help moderate interest rates, bolster the bond market, and, over the long run, aid companies that have to do a lot of borrowing.
All of which should mean improved corporate earnings, profits, and dividends.
While many independent economists have been skeptical of White House forecasts of a really hot economy in the last half of 1985, there appears to be concurrence that the economy has moved back from the brink of recession.
``From a sentiment point of view, things could not be much more positive'' on Wall Street, says Richard Yashewski, director of technical analysis at the Philadelphia-based Butcher & Singer brokerage.
Mr. Yashewski says he thinks it likely the market will be hit with a moderate correction during the next few weeks, noting that it has ``lost some of its intensity'' at present. ``The best way to get all the ducks in a row for an explosive rally is to go down 40 or 50 points.''
At E. F. Hutton, market technician Patrick Torpey thinks that, for now, the market won't make a big move either up or down. ``At the moment it's gotten a little overdone, so there should be some easing off.''
Still, Mr. Torpey says the traditional disinflationary, interest-sensitive stocks that have led the Dow for several years now should continue to do well, along with some capital-goods and high-tech issues. Yashewski, on the other hand, believes that market leadership has passed into the hands of basic industry and cyclical stocks.
Whatever the particulars, both analysts are bullish over the long run.
One reason for continued jitters on Wall Street is that a newly roused economy at a time of continued high borrowing from the federal government (even at the $172 billion deficit under the FY '86 budget compromise, that's a lot of borrowing) could cause persistent concern about a credit crunch. The federal funds rate rose last week in reaction to a heavy government refinancing schedule. Higher interest rates would have a negative effect on the stock market, since stocks compete for your dollars with int erest-bearing investments.
Still, in locations outside Wall Street, indications of a financial upswing are bound to be applauded. The gross national product for the first six months of 1985 was so meager that many economists said we were on the verge of a recession. If the index of leading indicators is right, those fears should now be allayed.
The stars of Wall Street last week were transportation stocks. One big reason: Right in the middle of the summer travel season, major airlines are planning to increase their fares.
True, ticket prices aren't going up much, and competition from discounters such as People Express and Continental might make it difficult for increases to stick. But there should be better profits ahead for airlines.
Since the late 1970s, the airlines have been slugging it out at the ticket counter. That was when government deregulation opened up competition. Generally speaking -- on short-haul, heavily traveled routes -- deregulation has meant lower fares.
Airlines have struggled with that. But lately, the airlines have been doing fairly well. Recent airline labor pacts -- especially the two-tiered wage agreements -- have helped them get costs under control. And with oil prices declining, jet fuel expense has fallen; fuel constitutes one-quarter of an airline's costs.
The fare hikes plus Saudi Arabia's apparent intention to boost production to its alloted OPEC quota -- effectively doubling Saudi output -- prompted a big move toward transport stocks. Regardless of the broader market, the stocks of companies that burn fuel should continue to benefit from such trends. Chart: Interest Rates. *Yields; Source: Bank of Boston.
Percent Prime rate 9.50 Discount rate 7.50 Federal funds 7.88 3-mo. Treasury bills 7.25 6-mo. Treasury bills 7.45 7-yr. Treasury notes 10.45* 30-yr. Treasury bonds 10.75*