A lower prime rate will help stimulate consumer confidence and keep the nascent recovery on track, according to Don R. Hays, director of investment strategy for Wheat, First Securities Inc., a Richmond brokerage firm.
Pointing to the drop in the prime rate to 8 percent and other economic factors, Hays said yesterday the economy will grow, boosting the Dow Jones industrial average to 3,600 by next Labor Day. "The consumer will respond," Hays told a meeting yesterday of the Baltimore Bond Club, an organization of financial professionals.
Major Maryland banks such as Maryland National Bank, First National Bank of Maryland, the Bank of Baltimore, Signet and Sovran lowered their prime rate to 8 percent, from 8.5, early this week after major national banks dropped their rates last week.
The prime rate is the interest rate that banks charge their best business customers. It traditionally is used as a benchmark for setting interest on other loans such as mortgages, home equity loans and auto loans.
Hays presented an unabashedly bullish view of the economy and the stock market during the next few years. "If you can avoid the headline mentality, you're going to make a tremendous amount of money in the next few years," he told the group.
He dismissed more pessimistic predictions by economists and stock analysts as too gloomy. In particular, he said, economists are always predicting that the economy will slip back into a recession once it starts to recover. "We are on a very normal, normal recovery," he said.
Hays expects the market to start to take off in October when the first predictions for fourth quarter earnings of publicly traded companies start to be issued. He expects the fourth quarter earnings to be very strong in comparison to the 1990 fourth quarter earnings, which were hurt by the recession. "It's going to shoot the market over the top," Hays said.
Also helping to boost the market will be the maturing in October of $150 billion worth of bank certificate of deposits, the largest amount maturing at one time in history, Hays said. With certificate rates in the range of 5 to 6 percent, those investors may be drawn to the stock market.
Hays expects the stock market to continue to climb through 1992 and then get another boost in 1993 when the oldest of the "baby boomers" turn 48. That is the point in life where people start to save seriously, he said. "You've gotten over your mid-life crisis and you've made it," he said.
He expects this effect to be dramatic. "They [baby boomers] have done everything to the hilt. They don't do anything half way," Hays said.
Hays has been in the investment business since 1969 and joined Wheat in 1984 as director of investment strategy. From 1960 to 1969 he worked as an engineer for NASA and was involved in the development and testing of the Saturn rockets that were used in the flights to the moon.