New York -- Terrifying at worst, confusing at best, the clouded outlook for 1992 is the legacy of a year that produced difficult times for businesses and robust gains for financial markets.
Share prices, fed by a volcanic Christmas rally, closed up 20 percent while the economy likely contracted and employment slid. In an appropriate final touch, the huge last-minute stock rally came on the heels of large cuts in profit forecasts by Wall Street analysts and corporate announcements of massive layoffs.
How long can the economy continue to go one way while share prices go another? "Eventually," said Michael Lipper, president of Lipper Analytical Services, "this divergence will have to lead to a convergence."
If there is a strong recovery, he argues, the stock market and other economically sensitive areas will continue to do well.
Otherwise? "Problems," he says.
That's bad news. Few predict a strong recovery soon.
The Blue Chip survey of leading economists suggests lackluster growth for 1992. A New Year's Eve release of the Commerce Department's Index of Leading Economic Indicators was even gloomier, pointing downward.
Amid such modest expectations for the economy, it's hard to muster foot-stomping enthusiasm for share prices. In a survey by I/B/E/S, a data collection firm, gurus hired by major Wall Street investment houses called the stock market "extremely overvalued" to "modestly undervalued." Note the relative intensity of the outlooks. The optimists are more reserved than the pessimists.
Reflecting the difficulty of forecasting, though, many in the "extremely overvalued" camp have seen their opinions ridiculed by the year-end stock market rally. And many forecasts made as recently as mid-December are already consigned to landfills. The Federal Reserve Board's decision last month to slash the discount rate a full percentage point appeared to galvanize untapped reserves of good feelings.
Still, it is difficult for many to sustain enthusiasm. Blocking accelerated prosperity are a long list of obstacles, from the slew of bankruptcies to the fragile condition of banks to the lackluster gains in service sector and manufacturing productivity. Confidence in the future remains severely depressed.
A more statistically based approach is similarly sobering. Based on past correlations between share prices and Wall Street forecasts, I/B/E/S concludes that share prices in 1992 could rise another 6 percent -- or plunge 19 percent.
The more optimistic forecasts depend on large earnings improvements from companies tightly tied to the economy, including the major auto, computer, chemical and steel manufacturers, as well as banks and airlines, I/B/E/S Research Director Richard Pucci said. In recent years, most of these have been notable for their consistent ability to disappoint.
So how can the optimists feel so good?
Ignore today's economy and look toward the (distant) future, they say. Conventional market measures have been skewed by the toll of massive write-offs on corporate net worth and profits. One-time delousing of financial statements this year guarantees the future will be better, enthusiasts argue.
And with inflation low, an industrial restructuring on track and the Soviet Union dissolved, enemies here and abroad have been squashed, clearing the way for a protracted U.S. economic revival, they add.
Meanwhile, recent declines in interest rates not only reduce borrowing costs for businesses but also lessen investors' interest in bonds and certificates of deposit. The most elated prognosticators envision trillion-dollar pools of cash, now resting certificates of deposit, pouring into the New York Stock Exchange in a search for high-yielding stocks. That not only would boost share prices but also would provide investment capital for growing, or strapped, companies.
These reasons seem unconvincing? Then try politics. Since the World War II, share prices have almost always risen during presidential election years, as incumbents do whatever must be done to invigorate the economy.
The cumulative impact of all these positive trends: The Dow Jones industrial average could reach 3,600 before the year is over, says one optimist with a successful track record, Wheat First Securities strategist Don Hays.
That would make 1992 another good year, a little better than average. According to more than six decades of data collected by Ibbotson & Associates, a broad basket of shares typically returns 10.1 percent, small stocks 11.6 percent, long-term bonds 4.5 percent, intermediate-term bonds 5 percent and 30-day securities 3.7 percent.
For many people, though, better -- and safer -- returns are available by repaying debt.
Credit card loans, for instance, swelled from $5 billion in 1970 to $231 billion last fall, according to Salomon Bros. That's more than $833 a person, and most carry interest of almost 19 percent. Why buy a certificate of deposit paying 4 percent, or take risks in a volatile market to get 10 percent, when repaying a loan saves 19 percent?