Puny economy serves up best, worst of times

PHILIP MOELLER

November 13, 1991|By PHILIP MOELLER | PHILIP MOELLER,SUN BUSINESS EDITOR

In a powerful display of capitalist irony, Wall Street is booming in the midst of the worst economic downturn in a decade (and the toughest times many professionals have known in their lives).

What's more, this apparent dichotomy is likely to get worse. In a good news-bad news scenario only a masochist could love, there is a strong possibility the stock market could continue reaching new highs next year.

The reason? Poor economic performance that will keep interest rates low and delay much semblance of economic vigor until 1993.

The stock market has always been a leading indicator that reflects future conditions in current trading patterns -- buy on bad news, sell on good news. Traders eager to cash in on a booming economy have always bought in advance of actual growth; likewise, the smart money often bails out of the market when it senses a dimming future.

Besides looking ahead to better times, stocks stand out today as the only game in town for profit-conscious investors. There simply is no place else for money to go.

Real estate is no safe haven. Interest rates are so low that certificates of deposit and other conservative investments are returning very puny yields.

Even layoffs, especially of higher-income professionals, are pumping huge sums of severance pay and lump-sum retirement payouts into the market.

A related surge in initial public offerings and other investment banking has brought in additional business.

Brokerage company officials thus may come across as apologetic, or callous, as they report record results against a backdrop of steadily worsening economic reports.

Further, U.S. households held only about $2.4 trillion in equities last year, or about 17 percent of total household assets. In the early 1970s, households held 30 percent of their assets in stocks, but reversals later drove investors to the sidelines.

Each of those percentage points is worth $150 billion in round numbers, notes the president of Legg Mason's brokerage arm, James W. Brinkley. And the continuation of current market trends can't help but aim at least some of this business his way.

Some levels of market valuation say stocks already are dangerously overvalued and that only continued sharp drops in interest rates are propping up stock prices.

However, one of Wall Street's most impressive seers -- quantitative analyst Elaine M. Garzarelli of Shearson Lehman Brothers Inc. -- said during a recent Baltimore visit that nearly all of her indicators point to higher share prices.

Ms. Garzarelli made her mark by calling the 1987 market crash and has consistently called market trends since. Her models of market activity continue to find little cause for anxiety.

Simply put, Ms. Garzarelli says that the economy will continue its disappointing performance into 1993. Inflation thus will remain in check, and Federal Reserve Board Chairman Alan Greenspan can continue a policy of low interest rates.

In short, the same conditions that have supported record market levels will continue, with comparable results. Eleven of Ms. Garzarelli's 13 major market indicators are bullish, and the other two are neutral. As measured by the Dow Jones average of industrial stocks, Ms. Garzarelli says the market could rise by 600 or so points, or roughly 20 percent, before she would worry about stocks being overvalued and in danger of a price correction.

Ms. Garzarelli is further known for translating her quantitative views of market trends into industry sectors. Most recently, they've included surprising comebacks for two depressed sectors, homebuilding and insurance. Her current seven favorites (and their percentage weighting in the Standard & Poor's index of 500 large stocks):

After-market auto parts (0.32 percent); alcoholic beverages (1.09 percent); soft drinks (2.51 percent); homebuilding (0.05 percent), life insurance (0.34 percent), multi-line insurance (1.22 percent) and tobacco (3.10 percent).

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