Slow Recovery Awaits Despite Dow Surge

BASED on expectations of a United States economic recovery, the Dow Jones Industrial average closed above the important 3000 point barrier last week for the first time ever. Barring the unexpected, however, the recovery will probably be modest and lean, most economists agree. That's the kind of situation that benefits such economic sectors as advertising, pharmaceuticals, and insurance - where expansion is slow yet steady, says Eric Miller, chief investment officer for Donaldson, Lufkin & Jenrette Securities Corporation.

"We know a lot about the downside of the current recession," Mr. Miller says. "But what's not being discussed is the upside; we [Donaldson, Lufkin & Jenrette] feel that the other side of the recession will involve two to three years of more subdued and modest growth.

"We have a great difficulty making a strong case for consumer cyclicals at this time, such as housing, automobiles, appliances," as well as industrial cyclicals, such as metals.

The Dow's rise in the middle of last week was linked to lower interest rates and better-than-expected earnings reports.

Still, many market analysts say the recovery - without substantial new moves by the Federal Reserve to ease credit - will be lukewarm. Consumers continue to hesitate in prying open their wallets. New business spending on plant and equipment is expected to grow only a modest 2.5 percent this year, according to the US Department of Commerce. Unemployment has been high in basic manufacturing, with many plants operating at reduced capacity. The crucial US auto industry recently turned in another unhappy rep ort; Big Three carmakers believe second-quarter production will fall to a 33-year low. Red ink is flowing at General Motors, Ford, and Chrysler. Finally, the carmakers, as well as other manufacturers, have a new problem; the economic slowdown now starting to occur in Europe could work against US companies heavily dependent on exports, says Suresh Bhirud, portfolio strategist for Dean Witter & Co.

During the first quarter of 1991, Mr. Bhirud notes in a recent study for Dean Witter, the best-performing stocks were in financial services, retailing, selected technology, and consumer growth. Worst market performers included energy issues (given the volatility the Gulf crisis caused in oil prices), basic cyclicals, utilities, and some technology stocks. Miller's favorite strategic sectors, for now, are advertising, chemicals, computers, pharmaceuticals, and insurance. Least-favored sectors include aut os (and auto-related issues), lodging, newspapers, and steel.

Regarding market strategy, Miller favors taking a balanced position; thus, the current asset-allocation model for Donaldson, Lufkin & Jenrette commits 40 percent of a portfolio to fixed income (bonds), 55 percent to stocks, and 5 percent to cash.

According to Miller, the overall stock market seems reasonably priced. Secondary stocks, he believes, will continue to outperform the big blue-chip issues. Part of the reason for the market's attention to secondaries, he says, is the rebound in the dollar against overseas currencies, which could inhibit the earnings and market performance of some multinationals.

Still, Miller says it is better to buy stocks based on individual company outlooks, rather than in terms of specific economic sectors within the economy. Conglomerates, by definition, engage in a broad range of enterprises and sectors.

Donaldson, Lufkin & Jenrette's focus on advertising is somewhat unique, since many investment houses overlook the sector. But Donaldson believes that the industry has growth potential not only domestically, but also abroad, particularly Europe.

Next year should be a good one for advertising. All events of the Summer Olympics in Barcelona, Spain, are expected to be televised. Then there's the World's Fair, the largest since 1970, in Seville, Spain. Between 15 million and 20 million visitors are expected. And Euro-Disney, the latest Disney resort/tourist complex, opens in France. Finally, economic barriers fall in the European Community in 1992, which should boost commerce.