"The stock market is on the way back.
The refrain is familiar and seems like wishful thinking. It is an analysis that has been popularized by your local broker and his boss, the Wall Street executive, both of whose livelihoods depend in no small fashion on the size of the commission generated by Americans buying and selling stocks.
The experts paid to be right, the investment strategists, have held a decidely less bullish attitude.
But in a report released today, one of Wall Street's most followed strategists (not only because he often is right, but also because he works for Merrill Lynch & Co. -- by far the most important firm in the securities business) proclaims that "there has been a dramatic shift in the vital signs."
If Richard J. Hoffman is right, that broker who has been trying to sell you stocks for the past decade now may be doing you a favor.
In an interview, Merrill Lynch's chief investment strategist said that by March 1982 the much-watched Dow Jones Indsutrial Average will be at the 1200 level. The Dow is about 935 right now -- higher than it has been in a while but still well below its 1973 peak.
Hoffman said stocks are the "last assets not marked up in relation to inflation. Years ago everybody used to talk about stocks at cocktail parties. iThen cocktail conversation shifted to real estate. They'll be talking about stocks again."
If you follow Hoffman's advice, however, be prepared to stay in the market for the long haul. His tourde-force is long-run strategy, not picking the periods when the market will rise or fall.
Even in a long-term bull market there are weeks or months when stock prices fall generally. In fact, Hoffman said, he "would not be surprised to see a brief market correction late in the summer or early fall in response to expectations of lower future rates of dividend growth and fear that economic recovery will be slow or unsustainable."
Hoffman said he would welcome such a correction (read: price decline) to "implement the last phase of our gradual reinvestment strategy."
Hoffman, and his associate Steven R. Resnick, base their optimist on 25 "vital signs" -- from broad economic indicators to consumer trends to technical stock market statistics -- that historically have affected the performance of stock prices.
Those signs reached a cyclical low during the last quarter of 1979 and the first quarter of this year, according to Hoffman. Since then, the vital signs have shown steady and substantial improvement. He said among the two most important changes are the sharply improved cash positions of both consumers and corporations.
Hoffman's vital signs had show a "continuous deterioration" from the middle of 1976 until the last several months.
The improvement in those vital signs now provides the background "for a bull market during which averages should reach new highs," according to Hoffman.
But he warns investors that even in a period of generally rising stock prices, certain stocks remain risky investments.
He said that oil companies should be avoided despite the outsized profits they have been earning in recent quarters. A worldwide recession is in the offing that will reduce oil demand, and oil company earnings, substantially, he predicts.
Similarly, Hoffman dismisses commodities and basic industries such as banking, utilities and steel.
He said that the top industries to shoot for are the high-technology capital-goods companies -- such as firms making semiconductors -- and the companies that benefit from the early stages of an economic recovery, such as homebuilding-related firms.
Hoffman said he thinks that investing in consumer-sensitive companies, including airlines and auto manufacturers, is also good strategy.
Hoffman and Resnick, who began to look optimistically on the stock market two months ago, join a growing number of bulls who populate Wall Street.
But the investment strategists at Goldman Sachs, who themselves think "the risk of being out of the market continues to exceed the risk of being in," caution that the outlook is not as firm as some would have it.
"The current position of the business and political cycles can be adapted to fit any scenario, enabling investors to enact their own version of 'Fantasy Isalnd'," Goldman Sachs said.