There seems to have been a dramatic philosophical change on Wall Street in 1982, one that probably bodes well for the financial markets in 1983.
Quite simply, investment managers and brokerage executives have virtually abandoned their long-standing fear of large and mounting federal deficits and decided the stock and bond markets will thrive this year despite them.
As recently as last spring when the market was flat and interest rates high, Wall Street's most astute money managers were expressing fears about the market implications of federal deficits in the $150 billion range. That figure appears certain to be go even higher with the government's surging borrowing demands a reflection of Washington's budgetary difficulties.
"The budget deficit will not come to the fore unless the stock market stalls or the economy sharply revives," said Leon Cooperman, chairman, investment policy, at Goldman, Sachs & Co. "The Street tends to seize upon whatever it has to."
Moreover, the almost unanimous view here is that the economy will continue to sputter along in 1983 with little sign of significant upturn until late in the year, at best.
That prospect, combined with disinflation, in Wall Street's view, puts the government in the position of being the nation's major borrower. "Crowding out" arguments get little attention. "Loan demand is so weak out there, the federal government has it pretty much to itself," said Robert Stovall, vice president of Dean Witter Reynolds Inc.
Despite the nation's substantial economic woes--record deficits, economic stagnation and continuing high unemployment--the coming year is generally expected to be a good one for the stock and bond markets, simply because interest rates are widely expected to continue downward. That broader gloomy prognosis for 1983 also includes the almost certain prospect of what Stovall calls the bank-debt problems of "overdeveloped companies and underdeveloped countries."
It was, after all, the investment world's acknowledgement of the Federal Reserve Board's reaction to the nation's bleak economic picture and resulting commitment to trimming interest rates that began the stock market's record-breaking summer rally.
The interest-rate rally proved to be the best of times for Wall Street. Brokerage house profits and their stock prices soared, and volume on the New York Stock Exchange jumped to 16.46 billion shares--up more than 38 percent from 1981. The Dow Jones Industrial Average ended 1982 at 1046.54, up nearly 20 percent for the year. The bond market also had an extraordinary year with corporate bond financing hitting an all-time high of about $45 billion--$4 billion more than the previous year.
Although most market watchers expect the financial markets to sag early in the year, they are bullish on the second half of 1983. While much of the first half of the year is spent worrying about the budget, Social Security and trade shortfalls, as well as foreign debt restructurings, "by the second half we'll get used" to those difficulties, Stovall said. "The recovery will be underway by the end of the year, and we'll have a very strong stock market again."
Like Stovall, most other stock watchers expect the Dow Jones Industrial Average, the most closely watched market barometer, to continue to drop close to the 900 level, with new highs later in the year besting the all-time high in the DJIA, set two weeks ago, of 1070.55.
"The stock market is supposed to be an anticipator," said Richard Yashewski, senior vice president at Butcher & Singer Inc. "What it needs, to anticipate better things, is lower interest rates. It doesn't need the reality of unemployment down to 7 percent or earnings up to a particular level. The only thing that could hurt right now is the end of the dream of lower interest rates. If interest rates were to reverse dramatically that would break the back of this bull market."
Many investment analysts agree with Yashewski's 1983 projection of a pull-back early in the year to "correct the excesses of the first leg of the bull market," followed by "another explosion" like that in August, when the market set staggering volume and advance levels.
There are some, although a minority here, who are worried that the economy is in even worse shape than most economists and government officials say, and that a steadily stalling economy early this year could turn Wall Street's bulls into bears.
"I do not believe that any significant advance in the stock market can be realized until the bottom of the recession can be pinpointed," said one skeptic, William LeFevre, vice president for investment strategy at Purcell, Graham & Co. Inc.
Another investment manager, Madelon Talley, president of Rothschild Asset Management, likens her concerns about the elusive economic recovery to "going through the English Channel listening to foghorns. . . They sound like they're right on top of you, but you can't see them."
But Talley, nevertheless, is expecting the market to do well in 1983 and has the fund she runs fully invested, as it has been since September 1982. "The Street is saying that slow economic growth is good for the unwinding from the problems of the late 1970s," Talley said.
Yet even if the seemingly near foghorns signaling recovery prove farther away than they sound, and even if the "unwinding" economy spells slow growth, market gurus say there is little doubt--barring unforeseen, dramatic events--that the key stock averages will end the year higher than they were as the year began.
Since World War II, bull markets have averaged 2 1/2 years in length and recorded total gains of about 65 percent. So far, since this push began in August, stocks, by most measures, are up just over half that figure. If past performances are repeated, the Dow Industrials could hit the 1,300 mark by the end of 1984.
Adding to Wall Street's upbeat view is the fact that lower interest rates make stocks and related consumer investments, such as mutual funds, appealing not only to the large institutions that dominated equity investments in 1982 but also to individuals. (Many mutual funds, for instance, had their best month in history in November.)
"When people hear about stock prices doubling, especially when they are getting 8 percent in a money market fund and are used to double-digit returns, they get greedy," Talley said. "The winding down of inflation suggests getting into common stocks."
However, the heart of the 1982 market rally--the sharp gains in large, heavily capitalized stocks--may not be the center of the 1983 action, market experts say.
Earnings are not going to improve in every sector of the national economy in 1983. "It's not a homogeneous ecomony in 1983," said Robert Farrell, vice president at Merrill Lynch & Co. "So, it's not going to be a homogeneous stock market either."