Have bulls become bears? Depends on who you ask

SUNDAY OUTLOOK

April 03, 1994|By Ian Johnson

Since coming tantalizingly close to hitting 4,000 points on Jan. 31, the Dow Jones industrial average and the rest of the stock market have been in a tailspin. An assassination in Mexico, scandal in Washington and the threat of resurgent inflation are just some of the market's worries -- on top of a feeling among some analysts that stocks are simply too expensive by historical measures and ripe for a fall.

The market's unease was highlighted last week when it closed out March -- and the first quarter of 1994 -- with a net loss. That was the first time that the market has been down for a quarter in two years. But are these concerns overblown? Is the market really in the midst of the predicted bear market, or is this just a glitch in the market's inexorable climb?

A. Gary Schilling

President, A. Gary Schilling & Co.

"I think we are in a bear market.

It's obviously not the breathtaking swan dive of '87 or the mini-crash in '90, but that's exactly the point. Everyone is looking for that. Everyone and their brokers don't remember what I call a Chinese water torture crash, something that grinds everyone into submission.

"We're going to see selloffs and weak rallies. People who think selloffs are buying opportunities will be repeatedly disappointed. It'll take some time, maybe the better part of the year, until we get to the point where no one wants to own stock. Then the market will have hit bottom."

Peter Canelo

Chief investment strategist, NatWest Securities Corp.

"I don't think this is a correction. If you define a good correction as a 5 or 10 percent drop, this is not even 5 percent. During the rest of the year you could have a real 10 percent drop but even this wouldn't ruin the case for a bull market.

"What's happened is the Fed has given us two puny interest rate increases. It's totally irrelevant to the economy. You have to ask yourself why the bond market is so depressed, having gone up from 5.75 (percent yield on the 30-year goverment bond) to 7.00 percent. I think the answer is not assassinations in Mexico or Whitewater or atomic bombs in Korea, or whatever else people have made up to explain things. People forget there was a bond buying panic last year. Yields went down to a level they should't have gone to. The panic is dying down and yields are going back to where they belong, which is 6.5 to 7 percent, but everyone is mystified and so stocks have gone down.

"People forget the fundamentals, which is a strong economy and strong earnings. If bond yields go to 8, I'm wrong, but my feeling is that the selloff is coming to an end and even if there is a real correction later this year, the stock market will still end the year north of 4,000, on its way to 4,400 to 4,600 next year."

Peggy Farley

Chief executive officer, Amas Securities Inc.

"The past week's events really were caused by two things that were made worse by economic and political uncertainty. One was end-of-quarter window dresssing. Big institutions took profits to make their books look better and that caused the market to drop.

"Another was Mexico, which really hit the bond market. When the yield on the 30-year government long bond hit 7 percent, this was a pivot point that caused stocks to sell off. There was genuine concern with Mexico, because we predicated part of our economic recovery on NAFTA (North America Free Trade Agreement with Canada and Mexico).

"But we're already seeing something of a recovery. The second quarter will be much better. The bond market will recover what it lost and the stock market will more than recover what it lost.

"What usually happens in a market that's seen a first quarter like this is window dressing in the opposite direction. Institutions will buy into equities and that will cause the market to rally. For the year, we're looking at modest returns like last year of 10 percent for the S&P (index of 500 stocks)."

Richard Cripps

Director of equity marketing, Legg Mason Wood Walker Inc.

"There are two types of bear markets. There's a bear market where the underlying economic fundamentals are deteriorating, as in 1990. The other is where you have a correction of valuation. That seems to be what we're in.

"The market has been driven higher over the last two years by falling interest rates. Now rates are up, so the market has to adjust.

"The market is caught in a vicious circle where signs of a strengthening economy are equated with inflation. A stronger economy could mean higher corporate earnings, but the question is whether the higher corporate earnings will outweigh the risk of inflation, which brings higher rates. So far, the market has put the emphasis on the risks of higher growth.

"To make a market call, you have to figure where rates will go in the future. They probably will go up. For the rest of the year, we'll probably be lucky if the market ends up where it started the year."

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