Treasury Secretary Donald T. Regan, calling the current bull market the "biggest equity market in history," predicted yesterday that the stock market would "remain on high ground for the next 18 months."
Regan, in a breakfast meeting with reporters, also said that the administration would likely revise upward its economic forecast for this year when it publishes new predictions in July.
Meanwhile, Wall Street economist Albert Wojnilower warned that the unexpectedly rapid recovery would force policymakers to accept higher interest rates. Wojnilower said the recovery "looks more and more like a typical business upturn" that will likely put upward pressure on interest rates.
There has been widespread speculation about whether the Federal Reserve will let interest rates rise soon in order to rein in money growth, which recently has exceeded the Fed's targets. Regan said the Fed must continue to restrain money sufficiently to curb inflation, while supplying enough cash to the system to sustain the recovery, but suggested that judgment of its performance be suspended until the June money supply results are available.
Companies are raising much more equity than in previous bull markets, with over $35 billion raised through the sale of stock last year, the Treasury secretary said, linking the activity to an improvement in the quality of corporate earnings. He said that old smokestack industries, such as copper and steel, have been able to raise new capital along with newer industries, and that this was an encouraging phenomenon.
In the past, as much as 60 percent to 70 percent of company profits came from paper gains in inventories, Regan, a former chairman of Merrill Lynch & Co., observed. However, now 90 to 95 percent of profits are from operations, he said.
Companies are now taking the opportunity to "de-leverage," or reduce the proportion of debt to equity, Regan said, contrasting this with the pattern in the 1970s.
Regan said that he believed the economy "is good for the next four quarters and probably beyond . . . we don't see our falling into the same thing that befell us in 1980, which was a two-quarter recovery and then back into a recession."
He also warned that there may not be such a revival in plant and equipment spending during this recovery as is typical.
The level of unused capacity is still high, which will tend to depress capital spending, and in the past a lot of investment spending has come in the industrial smokestack industries, which are now more depressed, he said.