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WALL STREET, CALIFORNIA | TALK OF THE STREET

November 12, 1996

Abby Joseph Cohen, chief financial analyst, Goldman, Sachs & Co., New York

The preelection polls were right: Mr. Clinton recaptured the White House but the Republicans retained control of Congress. Investors should be comforted that there were few surprises, and will soon return their attention to economic and market fundamentals.

Investors will likely expect continuation of the general policy direction of the last four years. These have been favorable for the economy, corporate profits and the financial markets. They include fiscal policy aimed at reducing the deficit, trade policy aimed at opening markets for U.S. producers and antitrust policy that accepts large business combinations if they allow U.S. entities to compete globally.

Following the usual postelection analysis, we expect investors to reemphasize the fundamentals that normally drive equity prices. The main issues for the remainder of the year will likely center around profit growth, its quality (good) and durability (also good), and interest rates (in a trading range that is benign for equity markets). We remain optimistic on the duration of the current economic expansion.

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Geraldine Weiss, editor, Investment Quality Trends, La Jolla

We are living through historic times in the stock market. When the books are written recording periods of investment insanity, we all can tell our grandchildren that we were there--an eyewitness to the hysteria, greed, delusion and the madness of crowds. This period in the stock market will rank right up there with the infamous tulip craze, the Florida land bubble and the overblown stock and real estate markets in Japan. When they ask why investors were blind to the danger, we will tell them that the party was too much fun, making money in the market was too easy. Everyone hoped that this time it would be different, the old rules no longer applied. And the band played on.

. . . The truth of the matter is that the market has risen too far and too fast to be maintained at current levels. Daily advances in the price of the Dow have become ridiculous. . . . The year to fear is 1997. The market generally experiences a downturn the first year after a presidential election--regardless of the victor. Economic figures which up to the election day are inclined to be favorable tend to become negative when political pressures subside.

The balance of 1996 in the stock market should be relatively benign. . . . We urge you to review your portfolios and take advantage of year-end rallies to lighten your portfolios and put your financial house in order.

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Byron R. Wien and William McIlroy, analysts, Morgan Stanley & Co., New York

Bad news for the economy is still good news for the stock market these days. The employment cost index showed a lower-than-expected rise, so fears that wage increases would force up the level of overall inflation subsided. Consumer confidence ticked down, causing concern that Christmas retail sales might be disappointing. The bond market interpreted all of this favorably, and long-term interest rates moved lower.

The linkage between interest rates and the stock market remains intact. Stocks rally on declines in long-term rates. Short-term, we believe that the long U.S. Treasury will move down to a 6.5% yield, causing stocks to move higher by year-end. During the next rally phase, we would expect investor optimism to increase, foreign investors to do more buying and small stocks to outperform. These are all signs of the final phase of the bull run, but we are not there yet.

We are making no changes to the fresh money buys this week. They include AT&T, Bristol-Myers Squibb, Cisco Systems, HFS, United Technologies and Citicorp.

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John Bollinger, John Bollinger's Capital Growth Letter, Manhattan Beach

So, as we come into the fall and winter looms, we must ask if the bottom in bond prices (top in yields) marks a top for the economy. And if so, whether stocks--which are long overdue for some contraction (if only to shake some of the riders off the wagon, or is it the gravy train?)--will take falling long-term rates to mean a weakening economy and poor earnings and sell stocks into higher bond prices.

This would be devastating for many, as they have had drilled in repeatedly over these past 20 years that higher bonds mean higher stocks. (If higher bond prices do mean lower stock prices, then only lower short-term rates will save the day, as they will be seen as simulative and thus supportive of earnings. This can get pretty convoluted. The essential point is that after many years of dependency on a relationship, stock investors may be about to be burned.)

--Compiled by Times staff writer Debora Vrana

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