Many sense a balmy setting for continued up-current in stocks
Boca Raton, Fla.
Ah, ``Boca'' in December. Warm ocean breezes stir cowlick tufts atop the royal palms. Exotic flowers soothe one's olfactory senses. A thousand miles from Wall Street, the halls of the pink-walled Boca Raton Hotel and Club are filled with easy laughter. Dressed in almost garish casual attire, the brokerage industry's top executives gathered here last week for the annual meeting of the Securities Industry Association. It has been a very good year. Pretax profits industrywide are almost double last year's take. And the mood is fittingly upbeat.
Trading on the markets last week only served to underscore the prevailing festive atmosphere.
In heavy midweek volume, Standard and Poor's 500, Value Line, and New York Stock Exchange composite indexes all shot to new highs. And the Dow Jones blue-chippers, led by IBM, also bested previous records. By Friday's close, despite some profit taking late in the week, the Dow Jones industrial average sat at 1,477.18, up 5.05 points in five trading sessions.
In a brief interview, just steps away from the chatter of wire service machines chronicling the rally, Daniel P. Tully, Merrill Lynch's president and chief executive officer, said this bull is the result of ``a great confluence of events.''
Mr. Tully cited lower interest rates, low inflation, confidence about the future inspired by President Reagan's meeting with Soviet leader Mikhail Gorbachev, Britain's moves to take private companies public, and the first stock offering in China in 38 years. These, he said, are evidence that financial assets -- stocks and bonds -- are the best investments.
And, in a speech before industry heads, Barton M. Biggs chose a similarly global, low-inflation rationale for his bullish market outlook.
``We are no longer in an inflationary world'' where hard assets outperform financial assets, said the well-respected director of Morgan Stanley & Co.'s investment policy committee. Mr. Biggs noted that weak farmland prices, declining office occupancy rates, and an unrequited building boom are the first signs of a ``major bear market in real estate.''
But he said that ``1986 is going to be a surprisingly good year'' for stocks and the economy as a whole.
Biggs expects Europe to be ``the locomotive'' pulling the United States and then Japan out of this period of relative economic stagnation. And he says stock markets already smell real economic growth around the world on the order of 4 to 4.5 percent next year.
In recent weeks, Biggs noted, the US economy has been showing signs of fresh growth. Railroad car loadings, truck loadings, and airline traffic are all up. Also, retail sales in the last week have been ``surprisingly good.''
``For the first time since the early 1970s, we really will be having a synchronized [world] expansion,'' with inflation in the US holding at 4 to 5 percent, he predicted.
And the US dollar? It will drop 10 percent during the next year, he said.
``I don't think the market has anywhere near discounted how much the decline in the dollar is going to help the big multinationals' earnings in 1986,'' this analyst contends.
This, combined with stronger European economies, means that the ``big earnings surprises in '86 will come from the IBMs, the GEs, the Minnesota Minings.''
Good news for the Dow industrial average? You bet. Biggs is not what you'd call a bashful bull. He predicts this rally will go to 1,800 or higher on the Dow. ``Eighteen-hundred is only 20 percent away, so we're not talking about a huge move.''
Investors will begin to concentrate on the large-capitalization, blue-chip issues, which he says are still underpriced.
And he suspects that as soon as they sense that the economy is picking up speed, good-quality cyclical stocks will come into vogue.
Biggs lists cyclical multinationals, airlines, railroads, truckers, and retailers as the soon-to-be leading issues. Most technology stocks will rise, but the smaller, single-product ``techies'' will fade into the first quarter, he maintains.
Last week, volume on the over-the-counter market hit 117 million shares, its third highest ever. But after this year-end rally, he expects the low-priced, lower-quality stocks to continue a slide begun in 1983.
For the bond market, Biggs expects a half-point decline in long-term Treasury rates, to around 9.25 percent, but a year from now, he thinks, they will bounce back to about 10 percent. Two to three years from now, he says, long-term bonds will be running in the vicinity of 7 to 8 percent.
This particular outlook turns sharply bearish in the long run, however. Sometime before the end of the decade, Biggs expects the ``most serious market break since 1973-74.'' That was when the Dow and S&P 500 fell about 50 percent, and the Value Line index plummeted some 80 percent.
There are others on Wall Street who agree with Mr. Biggs's hard-landing hypothesis. But as the Dow flirts with 1,500, it does not appear imminent. So for the moment, most here seem to prefer savoring this year's good fortunes. And of course, the tropical splendors of this Florida resort. Chart: Interest Rates. *Yields; Source: Bank of Boston.
Percent Prime rate 9.50 Discount rate 7.50 Federal funds 7.94 3-mo. Treasury bills 7.25 6-mo. Treasury bills 7.31 7-yr. Treasury notes 9.50* 30-yr. Treasury bonds 9.90*