Stock market analysts continue to be bullish about prospects for the market as 1977 commences. But the tendency for the market to fizzle rather than sizzle every time it hits the 1,000 number on the Dow has caused the bulls to pull in their horns somewhat.
The consensus among analysts is that the economic fundamentals remain positive, that President-elect Carter will generate enough confidence and put into effect enough stimulus to perk what is seen as an already reaccelerating economic recovery, that inflation will remain moderate and interest reates will climb only slightly, that corporate profits will rise by around 15 per cent and bring dividends up with them, and that all should be clear sailing for the stock market for the next 12 months.
But the market immediately faltered coming out of the gate as trading in the new year commenced, quickly dropping below its 1976 close of 1004,65 on the Dow Jones average of 30 industrials.
And Reynolds Securities research chief Robert H. Stovall points out that what happens in the firstfive trading days in January has with only four exceptions since 1950 determined the course of the stock market for the remainder of the year.
"We're operating in a climate of all too pervasive bullishness on the part of too many institutions and money managers," says Stovall. "I'm reaching the point where I don't have much confidence in my own logic. Logic dictates to me that I should be positive, but there seems to be some big bear operator in the sky who pushes prices down just when everyone thinks they will go up. And the market, in its perplexing perversity, goes into a swoon once it goes over 1,000. Why? Frankly, I just don't know."
Leon G. Cooperman, chairman of the Investment Policy Committee at Goldman, Sachs & Co., a big institutional firm, believes that the market is "moving from the worst of all worlds to the best" with "the stagflation environment of the past six months giving way to the slow but sustainable economic growth scenario."
The stock market could hit 1,000 on the Dow in 1977, Cooperman believes, surpassing its old record of 1051 set in 1973. This is a conservative estimate, he says, based only on the projected increase in earnings for the Dow stocks and not on any increase in the price-earnings multiple that is accorded to them.
But Cooperman says his forecast could go wrong if the market this year parallels the behavior of the post-World War II period when stocks as measured by the Dow closed 1945 at 193 and four years later, despite a strongly rising U.S. economy, had only managed to get up as high as 200.
At that time, investors ignored the prevailing economic fundamentals and instead invested quite cautiously because they still remembered the severe depression of the 1930s that only ended with World War II and feared that a postwar depression could be in the wings.
The Goldman Sachs executive notes that money managers today are similarly skittish as a result of the steep stock market slide that decimated equity portfolio values in 1973 and 1974, and that, for many, preservation of capital has supplanted maximum return on investment" as the primary objective.
This desire to minimize risk "could make for a more sterile and less exciting environment" for stocks in the coming year, says Cooperman, leading to a continuation of the market's tendency through most of 1976 - after the burst in January - to bob up and down in a narrow trading range.
However, Cooperman, along with many other analysts, thinks that any downside risk in the market is very minimal, and he there fore recommends a fully invested position at this point to take advantage of the more likely possibility of a significant rise in the market in 1977.
In 1976, the Dow Jones average of 30 industrial stocks gained nearly 18 per cent, but 14.5 per cent of the gain came in the spectacular January burst which saw New york Stock Exchange trading volume average around 40 million shares a day. For the year, the volume averaged a tamer 21 million shares a day.
But Paul Bernstein, in charge of portfolio strategy at Drexel Burnham Lambert, points out that only watching the Dow understates the real gain in the market in 1976. Both the New York Stock Exchange composite index, which weights all stocks traded on the Big Board, and the Indicator Digest index, which tracks 500 common stocks on an unweighted bais, finished 1976 at their highs for the year and both outperformed the 30 Dow industrials.
The NYSE composite index was up 21 per cent and the Indicator Digest measure gained 37 per cent for the year, indicating that the blue chips underperformed the market as a whole.
Bernstein looks for the broad market to continue rising more briskly than the Dow, which he sees going to about 1060 to 1070, with further advances possible only if the inflation outlook turns out to be better than the forecasts.
"The market as it approaches midyear would have to be convinced that inflation is not accelerating, and that the long-term growth rate is at 4 per cent as a minimum," says Bernstein. "But inflation is the key, and will remain the major deterrent to a major advance. If someone is talking about 1200 or 1300 on the Down, that person is probably talking about a declining inflation rate throughout the year."
Another factor which will tend to keep stock prices down is the continued competition from high-grade, long-term bonds which still are yielding close to 8 per cent with minimum risk.
The bond market staged a major rally in the final months of 1976 as interest rates dropped to their lowest levels in four years and the Federal Reserve Board appeared to be pursuing a more accomodative monetary policy.
This rally is expected to continue through the first few months of this year, until short-term interest rates are projected to begin climbing again on the strength of a resurgent economu. Long rates are not expected to go up much, but most analysts predict they will stay level. If the inflation experience, however, is better than now anticipated, this could lead to a drop in long-term yields that would be quite bullish for stocks.
As to what stock groups should perform best, analysts continue to emphasize industries with primarily domestic markets that will benefit from the brisker pace of economic activity in the U.S. than abroad. Among groups that pop up frequently on analysts' lists are insurance stocks, regional banks, publishing companies, railroads, and home-building supply firms.
Medium-sized companies with solid earnings records that are not yet heavily represented in institutional portfolios also are recommended for more than average appreciation.