Stocks start year on cautious but hopeful note

``We're stuck in neutral,'' laughs Larry Wachtel, a market analyst with Prudential-Bache Securities, who laments the lack of any strong, centrally defined theme in the market right now. ``There are lots of hypotheses about what might happen at this time of the year: that institutional managers might commit a lot of cash to the market; that after the year-end tax decisions by buyers there might be some type of rally - what we call a `Santa Claus rally.' But they're only theories, and so far nothing much is happening.''

But if calendar year 1988 appears to be going out with somewhat of a yawn, at least it's ending on an uptick, analysts say. Since the beginning of 1988, stocks have produced a total return of 15 percent - and about 27 percent since the October 1987 crash, according to Abby Joseph Cohen, senior investment strategist for Drexel Burnham Lambert.

Ms. Cohen also sees the market - as measured by the Dow Jones industrial average - continuing its gradual climb during the year, perhaps by as much as the 15 percent rise expected in profits. Although Cohen does not see a recession around the economic corner, she says conditions could develop for such a situation in late 1989.

For the moment, she says, the outlook for equities continues to be favorable. Thus, Drexel is recommending an asset allocation for balanced accounts of 54 percent stocks, 25 percent bonds (short to intermediate), and 21 percent cash.

The market, she says, ``is currently fairly valued,'' based upon Drexel's dividend discount model.

Cohen likes growth stocks, which she says tend to sell at a premium on a price/earnings basis. ``But currently, they are not selling at much of a premium,'' she notes. ``And that makes them particularly attractive.''

Gains for growth stocks represented only one small segment of a somewhat confused market last week. The Dow, emitting its own year-end glow to match the almost balmy weather in Manhattan last week, rose to a new, post-October 1987 high. Based on hefty action in blue-chip issues, it scooted up to 2,187 points in trading Tuesday, Dec. 20, before falling back into the 2,166 range. The Dow's highest closing this year was at 2,183 points, reached on Oct. 21. For the week, the Dow closed up 18.22 points at 2,168.93.

One sector now being closely monitored by the market is industrial firms, many of them located in the upper Midwest and linked to the export trade. Capacity utilization for this group continues to be high, while capital spending plans are up for the foreseeable future.

Prices as measured by last week's announcement of lower-than-expected inflation in November, continue to rise only moderately, a development that usually helps moderate wage demands from workers.

All of these factors suggest to some folks that there could be a ``revival of the industrial revival,'' as Dillon, Read & Co. Inc. observes in a new report.

Dillon, Read believes that if there is to be an ``upward bias in the stock market over the next six to nine months, it will be driven by the industrial stocks, not the defensives.''

Dillon, Read expects six stocks in particular to post gains as part of an industrial revival: CBI Industries, Combustion Engineering, Fluor Corporation, General Signal, IMO Delaval, and the Timken Company.

L. Michael Braig, an analyst with the brokerage firm of Prescott, Ball & Turben, Inc., also likes Timken, but he takes issue with the conclusion that an industrial revival is necessarily on its way. ``There's a lot of square footage and manufacturing plant located in the Midwest that's still idle,'' he says.

Perceptions can differ, Mr. Braig says, based on whether the investor is ``on the inside looking out, or the outside looking in.''

Braig, whose offices are in Cleveland, in the heartland of industrial-America, does not believe that the current capital spending thrust adds up to a meaningful ``boom.''

He is disturbed by the lack of acceleration in capital spending, with, for example, third quarter spending slightly below the level for the second quarter. Further, he is concerned by the discrepancy between actual spending by manufacturers as opposed to intended spending, with actual spending tending to stay below earlier projections. And he finds that most of the actual spending is within a small group of sectors - paper, chemicals and metals - rather than across the manufacturing sector in general.

The upshot, says Braig, is that he is not willing to extrapolate ``boom conditions from current spending trends.'' Rather, he says is it important just to ``accept current spending strength, such as it is.'' Though he does believe the current level of strength may extend into 1989, he says the rate of gain may decrease.

Braig, however, is not a seasonal Grinch. He notes that Prescott's list of preferred stock names is now longer than at any time in the past four years. He particularly likes component producers, including Bearings, Inc., Trinova, Parker-Hannifin, Timken, Commerical Intertech, and Ingersoll Rand.