Abby Joseph Cohen, equity strategist with Goldman, Sachs & Co., sees the Dow Jones Industrial Average breaking the 7,000-point threshold this year.
Richard McCabe, chief market analyst with Merrill Lynch & Co., is more pessimistic. He thinks the index could fall by as much as 25 percent, until it fights back to end the year flat or slightly down.
Who's right?
Who knows?
The market fooled experts last year by staging a second-half rally that sent the Dow up 26 percent to close at 6,448.27 points. The gain was the encore performance from its 33.5 percent gain in 1995.
But experts aren't so sure the Dow can three-peat in 1997.
They see a year of volatility for the index, which is made up of 30 large company stocks. And most agree that the Dow won't be able to match the gains it made last year or in 1995.
"I think it is going to be a ragged year overall," McCabe said. "At very best, it will be a flat year."
McCabe's belief is based on history. Post-election years tend to produce below average returns, he said. And six times this century, the Dow followed a stellar year with a 20 percent gain. The third year was always a downer.
"Maybe that is a rule that is going to be broken," he said.
McCabe said the 20 percent to 25 percent decline in the stock market could start in February or March. "It could be over by spring or midyear," he said. "I'm inclined to think we get a smaller pullback here in the winter, maybe a 10 percent correction."
The decline will be a temporary setback, McCabe says, because he sees the bull market running free in 1998 and 1999.
But predicting the stock market is no easy task. What has confounded the experts is the unprecedented amount of money flowing into stocks through mutual funds and 401(k) retirement plans. The baby boom generation is given some credit for flooding the stock market with cash.
"We old guys have never seen anything like this before," said David Orr, chief capital markets economist with First Union Corp. "Wherever these baby boomers have been for the last 30 years, they have changed the dynamic of whatever they're dabbling in, whether its Gerber [baby food], or blue jeans, or beer or politics. It seems to be changing the dynamic of the equity market."
Several factors have been constant in 1995 and 1996: strong corporate earnings, low inflation and low interest rates, all of which helped spur the Dow to record highs. But it is unclear whether they can continue to drive it higher in 1997.
Experts see at least one of the engines slowing - corporate
profits. Richard Cripps, director of equity marketing with Baltimore-based Legg Mason Inc., expects corporate profits for the 30 Dow companies to grow about 3.2 percent, down from nearly 9 percent in 1996. He also sees fewer companies benefiting from firing employees and restructuring their operations.
"Adding to the pluses and minuses in the current market, we believe investors should be cautious, but not bearish," he said in a report Jan. 6. "Unless a significant change occurs in economic assumptions, the downside is limited to a 10 percent to 15 percent valuation correction."
Orr agrees. "To the extent that valuations matter, the profit underpinning is becoming less of a solid foundation," Orr said.
He expects operating earnings to grow less than 5 percent for Standard & Poor's 500 stock index companies, compared with an average 15 percent in recent years.
Orr believes the stock market is overvalued."I personally think the stock market needs to go down 12 percent in order to be fairly valued," he said, adding that a decline in the market would "probably happen quickly, and so there is really no way to prepare for it."
Others like Cohen are more optimistic.
Cohen says the economy will "continue to bring smiles to the faces of investors."
"The pace of earnings growth has not set any speed records, but the key descriptors are durability and quality," she said in a December report.
Douglas Eby, portfolio manager with Bethesda-based Robert E. Torray & Co., which manages $2.3 billion in pension money as well as a $120 million mutual fund, agrees that profits will hold up.
As a result, the stock market should thrive in 1997, he said.
"I don't see a big drop in the market," Eby said. "All of the indicators are extremely positive. I think it is going to be higher than it is now."
Pub date: 01/19/97
