These are uncertain days on Wall Street.
When it comes to forecasts, the investor can take his pick. Depending on which analyst is talking, the stock market is either trendless, moving sideways, heading down or on the verge of a tremendous rally. Each prediction generally comes complete with enough facts and figures to sound convincing.
For most of August and early September, traders found the stock market to be a lackluster place. Volume on the New York Stock Exchange ran under 100 million shares on most days, the level that has become the dividing line between moderate and heavy trading.
The closely watched Dow Jones Industrial Average, composed of 30 industrial stocks, fluctuated in a narrow range, trending down to the 1,307 level last Friday, but still only about four percent below the record of 1,359.54, set on July 19. When 1985 opened with the DJIA at 1,211.57, only a brave forecaster was willing to predict the average would reach 1,300 this year. That mark was reached by early spring.
Even a recent healthy dose of good news barely stirred the market. When the nation's unemployment rate dropped to 7 percent, the lowest level in five years, the DJIA bounced 9.86 points but did not carry the broader market. "It was a trader's rally, one without conviction and without durability," Michael Metz, analyst for Oppenheimer & Co., said at the time. "The market was starved for good news and was ready to react to it."
Given its earlier momentum, the market's sagging activity and enthusiasm has puzzled analysts trying to forecast what happens next.
John D. Connolly, co-chairman of Dean Witter's investment policy committee, recently offered this analysis to clients: "Both bond and stock markets continue at near-cycle highs, yet we sense a heightened level of tension about the course of events from here. The major problem is the seeming uncertainty of the near-term economic outlook."
"A great deal of disappointment," Connolly added, "has been expressed over the failure of the economy to give a clear cut signal of renewed growth. The indicators continue to be mixed."
Connolly's view is that the market will rebound eventually, based on four factors: the rapid growth of the nation's money supply, the peaking of the dollar and its favorable impact on the trade deficit, an expected pickup in inventories and an improvement in the housing market caused by lower interest rates.
When the market might pick up is not clear, Connolly said in an interview, "It's a trendless market at the moment. And I think it's a market that's waiting for confirmation of what's going to happen."
Greg A. Smith, head of research for Prudential Bache, told his clients, "Our own position is still that the economy is going to muddle through well into 1986, but we think other investors may come to a different conclusion some time this fall, which could be deadly. Investors may decide that they are simply confused and decide to do nothing. This could lead to a stagnant stock market environment. . . .
"Muddling through," Smith said, "means that the U.S. economy remains constrained by trade deficits and weakness in the manufacturing sector and pushed by strength in the construction and service areas. The upshot: an economy that averages out at a growth rate below historical levels."
Smith suggested that the market's "next major move" might have to wait for "the cash from the individuals' saving season, which won't begin until later this year and really is concentrated in the first half of next year." In the meantime, he said, "It looks to us like the focus for the remainder of the year will revert to stock selection, and that means identifying companies with a good chance for earnings improvement in a world where earning stories will be fairly scarce."
The level of tension mentioned by Connolly is reflected in the state of investor sentiment, as measured by Michael Burke, editor of Investors Intelligence, which polls the opinion of 135 advisory services. Burke's poll last week showed 48.7 percent were bullish, 29.1 percent were bearish and 22.2 percent were looking for a drop that would be considered a buying opportunity. Several weeks ago, Burke said, bullish sentiment was as high as 60 percent while bears were only 20 percent of the poll.
Burke said, "We think there may be enough strength in the Dow maybe to get up possibly to the one more new high but it's probably not worth chasing after. We would be . . . lightening up and trying to build up cash reserves at this point. . . . For every stock that looks attractive to buy at this point, there are four of five that look attractive to sell," he said.
The bearish view was shared by Charles S. Comer, a market analyst for Oppenheimer & Co. "I think for the moment the market will work erratically lower. . . . I suspect that for the bulk of the autumn, the market's going to be generally flattened down and we are probably talking about something in the 1,250 DJIA or lower neighborhood." He said he expected the decline to be "slow and torturous."
Beyond Wall Street's normal concerns over interest rates and the economy, some Wall Streeters suggested, other issues and events were affectiong investor attitudes. David M. Jones, an economist with Aubrey G. Lanston & Co., said he thought the crisis in the Farm Credit System would persuade the Federal Reserve not to tighten monetary policy, despite the rapid growth of the money supply. "All bets are off now," he said. "I don't think that they will, in fact, be involved in any tightening . . . " The Fed, he said, will "hold steady."
Concern about events in Washington also is contributing, Jones said, to "a clear amount of investor uncertainty" about what will happen to tax reform and the budget deficit. "But certainly I can say that Wall Street, up to this point, is quite disappointed in actions taken . . . "
Congressional sentiment favoring protectionist legislation worries a number of analysts -- while others said the issue was overrated. One of those who expressed concern was Edward Yardeni, director of economics and fixed income at Prudential Bache, who said such legislation would do "more damage than good" to world trade. If such measures were adopted, he said, investors might find that "it is best they be out of the market."
Given the uncertainty of the market, investment analysts have been trying to find sectors that appear likely to produce stability if not dramatic gains. It has not been easy. Oppenheimer's Charles Comer said, "I can't find a single group or sector of the market that I'm excited about going out and buying today. . . . Well, actually, there is one area . . . the takeover stocks, which is about the only place there is any action."
Dean Witter, which recently advised investors to keep 4 percent cash, 25 percent bonds and 71 percent stocks, has placed its heaviest emphasis on the capital goods-technology sectors and basic industries. Energy gets its lowest ranking. At Drexel Burnham Lambert, analyst Abby J. Cohen, said her firm was going after good values in technology stocks. Of the 30 stocks on their priority list, she said, one third were in economically sensitive companies. Michael C. Aronstein, a Merrill Lynch strategist, said his firm was emphasizing traditional sectors, including steels, chemicals, mining stocks and heavy equipment.
Robert Prechter, editor of the Elliott Wave Theorist of Gainesville, Ga., who studies trends in mass psychological change, believes the curent period is part of a long-term bull market and says the market will move "substantially higher," going to 1,700 in the next six months. Prechter says, "A majority of today's investors are cautious and skeptical. In fact, in recent weeks," he added, there has been a tremendous surge in short selling and the buying of 'puts,' which is a bet on lower prices." That action, Prechter said, "is as bullish as it can be."
Prechter explained that bearish sentiment indicates to him that investors have already sold their stocks and the "more bearish they are, the closer you are to a market bottom." Thus, once prices have come down, he said, investors will begin to buy and send the market up.
Don Hays, director of investment strategy for Wheat First Securities, also is strongly bullish. One reason, he said, is that his firm sees "early warning signals" from his analysts pointing to "a healthy economic rebound in the upcoming months." Those signal include evidence that July sales and shipments in the retail, furniture and trucking sectors showed improvement