Prime Time for Wall Street’s Recession Bulls
NEW YORK (AP) _ While the state of the economy worsens, common stocks actually look more appealing to some stubborn optimists on Wall Street.
As unemployment rises and business output falls, these analysts say, the nation appears to be moving a lot closer to the point where recession bottoms out and recovery starts to stir.
If history is any guide, they say, the stock market could well anticipate that turning point with a rally starting at least a few months beforehand.
″Many of the sharpest stock market rallies of all time occurred at this stage of the business cycle,″ says Mark Stumpp, director of research at PDI Strategies, an affiliate of Prudential Insurance.
″According to our valuation models, stock values are the best that they’ve been in years,″ Stumpp declares. ″We hope that the consensus is right and that the economy bottoms by mid-1991, because stocks should bottom sometime before then.″
Common sense and prudence might argue that this kind of thinking is a risky way to approach the mission of managing one’s hard-earned savings.
Indeed, many advisers say a conservative investor with a long-term perspective might wait for some solid signs of improving conditions before making any significant new commitment to stocks.
But professionals and aggressive individual traders can be counted on to try to jump into stocks before signs of recovery have become generally apparent.
That occurred in early 1975, when stocks rose sharply before anyone was sure that the 1973-75 recession was coming to an end.
It happened again in August of 1982, though the 1981-82 recession officially continued almost through the end of the year.
Such behavior has helped earn the stock market a reputation as an adept forecaster of swings in the economy, and a place as one of the 12 components of the government’s index of leading economic indicators.
Elaine Garzarelli at Shearson Lehman Brothers is projecting that the recession will end next summer after a run of about one year.
Based on a series of 13 market indicators she follows, Ms. Garzarelli maintains that the Dow Jones industrial average has already seen its low point for the cycle, at 2,365.10 on Oct. 11.
″We continue to believe equities should be accumulated on any market weakness for superior returns over the next 12 months,″ she says. ″A DJIA level below 2,500 remains an excellent buying opportunity - we would consider it a gift if it does indeed occur again.″
The bullish case set forth by most of the bulls rests on more than just a study of past market patterns. One tangible cause for optimism, many believe, can be found in falling interest rates as the Federal Reserve relaxes its credit policy.
Still, there are big hazards involved in speculating on an economic turnaround - in particular, the possibility that the economy might fall into a deeper and longer slump than most Wall Streeters now expect.
As stocks have rebounded a bit since October, ″I think what we’ve seen is a classic example of what’s known as a ‘sucker rally,‴ argues Mike Ducar, director of investment research at IDS Financial Services in Minneapolis. ″Others call it a ‘bear trap’ - a rally in a bear market.
″There’s no solid, fundamental reason for it to continue. The biggest problem is that corporate earnings are going to be dismal for at least the next few quarters.
″Companies need money to grow, and these days, with the lending institutions in poor shape, they’re going to have a tough time getting it. What’s more, many companies have too much debt to begin with.
″In my opinion,″ Ducar concluded, ″with only the rarest of exceptions, this is no time to be a buyer.″