The way the stock market started 1978, the portents seem to be for another disasterous year for investors after the 17 per cent slide in the Dow Jones industrial average last year in what some have dubbed the Carter market.
But many analysts remain hopeful that the current bear market could bottom sometime in the first half of 1978, perhaps sooner rather than later given the initial steep slide, and that there then will be a rebound that will provide investors with some good profit-making opportunities.
The old Wall Street adage is that you don't make money buying after the market has gone up, only after it has gone down.
But projections for any major rally form the botttom are subdued because of the many uncertainties overhanging the investments outlook.
In the first five trading days of 1978, the market plunged 47 points and decisively broke through the psychological 800 barrier on th Dow which in the recent past had provided solid resistance. The Dow reached lows that have not been seen since the depths of the New York City fiscal crisis in late 1975.
Driving the market down were concerns about the strength of the dollar, the size of the trade deficit, higher interest rates and more inflation, qualms about the anti-inflation stance and capabilities of new Federal Reserve Board Chairman G. William Miller, fears that the economic recovery won't be sustained in 1978, uncertainties about what energy and tax policies finally will emerge from Washington and, above all, a feeling of low or no confidence in President Carter's ability to handle the mounting problems and to provide leadership in the economic area.
Because the market's direction in January, and even in the first five trading days of the year, has proved to be an accurate harbinger of what the full year will bring in about 60 per cent of the cases over the last 30 year, the omens would not appear good.
But analysts generally believe there is increasingly little downside risk in the market as the Dow approaches the 700 level - at 700 the Dow stocks would be yielding an amazing 6.5 per cent in dividends - and they talk about a possible bounce-back later this year to around 900 if progress is made on some fronts that currently trouble investors.
A startling consensus now exists among money managers that the market will go down in the first half of 1978 to about 750, noted Leon G. Cooperman, head of the investment policy committee at Goldman, Sachs and Co., and up in the second half - closing at 900. That would represent a gain for the year, and 1978 would be an up year.
Cooperman said the three alternatives to this consensus scenario are that the market could decline more substantially and drop below 700, that it would not lift up in the second half, or that it would bottom earlier - perhaps in the next three to six weeks - and then rebound.
He indicated he leans to the third possibility, but said that any bounce-back probably would be tepid.
Currently troubling the market is investor preoccupation that we are in the latter stages of an economic recovery, with a tremendous fear of getting caught, along with the negative assessment of Carter administration policy, Cooperman said.
Some see Carter as anti-business, while others more charitably say he just doesn't understand business, he added. But the uniform negative view of Carter in both the United States and Europe provides the President with opportunities to score pluses with investors in the forthcoming economic and budget messages and in the specifics of his tax-cut proposals, Cooperman said.
The steep decline of the dollar has been viewed as a psychologist vote of no confidence in our currency by foreigners. But its effect on the stock market has been more direct because it has dried up virtually any foreign buying of U.S. stocks in the last six months. With a 20 per cent appreciation of the Swiss franc against the dollar in the last year, for example a Swiss investor would have to have earned 20 per cent on a U.S. equity investment just to stay even.
Markets are moving by incremental buying and selling, commented Jack L. Rifkind, director of research at Mitchell, Hutchins, Inc., who added that the absence of foreign buying in the face of timid investment by institutions has proved to be a major depressant.
"If we see the dollar stabilize or show real strength against the major European currencies, that's the only thing that could really move this market up," he said.
Many analysts have noted that the Dow Jones averages were only part of last year's story. Although the big-capitalization stocks that make up the Dow plunged, the stocks of many small companies had a great year, and so did those who invested in them. The 15 per cent rise in the American Stock Exchange index and the 7 per cent gain in the over-the-counter NASDAQ average reflected this disparity.
For the coming year, opinion is divided over whether secondary stocks will continue to outperform the Dow or whether they are vulnerable because of their runup.
Most brokerage firms, however, continue to cull the lists of secondary stocks and claim there are still substantial numbers of under-priced, high-quality companies available representing the best opportunity for price appreciation.Of course, buying a company that turns out to be a takeover candidate can prove to be a real bonanza, but knowing this in advance is likened to looking for a needle in a haystack. But the tender offer takeover trend also is expected to continue in 1978.
If 1977 was a dissappointing year for the stock market, it was a particularly rocky year for Wall Street itself as the merger and consolidation trend which was spurred by the unfixing of brokerage commission rates in May 1975 quickened.
Cut-throat competition for institutional business, decling trading volume, and the fear that the Securities andExchange Commission would eliminate restrictions on off-board trading - in effect allowing any brokerage firm that wanted to deal directly with the public as a buyer or seller to do so - produced some giant mergers.
Reynolds Securities was folded into Dean Wittier in the biggest Wall Street merger ever. And Lehman Brothers and Kuhn Loeb, two of the Street's oldest and most prestigious names, also combined. And Loeb, Rhoades became Loeb, Rhoades, Hornblower as it acquired Hornblower, Weeks, Hemphill, Noyes, which itself had merged with Spencer Trask earlier in the year. And Paine, Webber took over Mitchell, Hutchins, as the research-oriented brokerage firm virtually disappeared as an independent entity.
At the end of 1977, the SEC seemed to back away from its enthusiasm for eliminating the off-board rules after dire warnings of what a proliferation of dealer markets could mean for the exchanges and for investors. That dampened some of the merger pressure.
But 1978 is expected to be a continuation of the consolidation pace, with the SEC pushing the industry toward a national market system and an uncertain future. And the only brokerage firm large enough to feel comfortable is probably Merrill Lynch, Pierce, Fenner & Smith.