BUSINESS

An uncertain outlook

Experts cast doubt on the market’s future

ANN WALMSLEY October 17 1988
BUSINESS

An uncertain outlook

Experts cast doubt on the market’s future

ANN WALMSLEY October 17 1988

An uncertain outlook

BUSINESS

Experts cast doubt on the market’s future

Stock market forecasting is an uncertain practice at best. Those analysts who guess right are acclaimed; those who guess wrong are mocked. But in the 12 months since last October’s largely unpredicted stock plunge, investors have gravitated to market gurus and top economists for clues about what may happen next. So far, there is no broad consensus about whether markets could crash a second time or whether a recession or a severe depression is imminent. Maclean’s asked four of North America’s most widely followed market analysts for their predictions.

Robert Prechter: The influential market analyst offers one of the bleakest stock market forecasts. The reputation of Prechter, a 39-year-old former rock musician living in Gainesville, Ga., reached mythical proportions when his Oct. 5,1987, newsletter, The Elliott Wave Theorist, advised investors to bail out of the then-booming market and convert all their investments into safe U.S. government treasury bills.

Some observers said that his recommendation actually contributed to the market crash two weeks later. Today, he is unflinching in his pessimism. Prechter is a disciple of the Elliott Wave Theory, which holds that investor psychology and social trends, not such factors as news on interest rates and trade figures, propel the market.

Pretcher argues that, although corporate profits have been strong and inflation has remained relatively low in 1988, investors are still nervous, especially about such long-term problems as global debt. And Prechter says that the resulting anxiety—rather than a worsening economy— is what actually causes stock prices to fall. “The average investor is quite confused,” Prechter added. “He sees all this good news about the economy, and yet the stock market languishes.”

Indeed, Prechter maintains that North America is headed for a long economic depression. As in the 1930s, he says that the collapse will feature falling stock and commodity prices. Said Prechter: “I have no desire to be the cheerleader for a bear market or to be the new Mr. Depression, but I think this bear market

could go into the first half of the 1990s, and stock values could ultimately drop by at least 50 per cent from last year’s high.”

Ian McAvity: Prechter’s pessimism is shared by one of Canada’s most respected market analysts and the author of a Toronto-based investment newsletter, Deliberations. A shrewd and intense intellectual with a jaunty beard, McAvity, 46, says that North America is about to enter a period of economic decline and

that the stock market will plummet by 30 per cent, beginning in early or mid-1989. He claims that two factors have delayed the onset of the decline: the U.S. Federal Reserve Board’s aggressive lowering of interest rates immediately following last October’s crash, and the fact that many investors recouped their stock losses by investing in the booming bond market.

But McAvity claims that stock prices will drop following the November U.S. elections. His detailed charts show that in only two of the 12 postelection years since 1940 have stocks risen steadily. In eight instances, stock prices dropped, whether the new president was a Democrat or a Republican. The problem with

postelection years is explainable, according to McAvity, by the tendency of the new government to immediately introduce higher taxes to help pay for pre-election spending undertakings.

Overspending in the past by the U.S. administration and the mountain of debt that funds it are his greatest worries, McAvity says. Last week at a conference in New Orleans, he said that an economic downturn would refuel U.S. protectionist sentiments, alienating Japan and other countries that fund the debt by buying U.S. government bonds. Without those investors, he said, the economy would literally collapse. Added McAvity: “Those mistakes have not been made yet but those are the mistakes that caused the Great Depression. Even if they are not made, North Americans are about to enter an era of significantly reduced standard of living.” McAvity has told his subscribers to

shift at least 50 per cent of their stock portfolios into U.S. and Canadian treasury bills. He declared, “I am not interested in staying around for the last dance.”

John Templeton: The wealthy market veteran is still optimistic about the market’s future. Templeton, 75, a devout Presbyterian who lives in the exclusive Lyford Cay Club in the Bahamas, is the manager of one of the world’s most successful groups of mutual funds. In charge of $15.7 billion in assets, he has a vested interest in a stock price increase. Since the crash last October, he has spent $1.2 billion of his funds’ $2.4-billion cash reserves on what he describes as bargain-priced stocks. But if

the markets slide below last October’s levels, those stocks could look expensive. Templeton, who readily acknowledges his chronic optimism, says that the markets’ apparent aimless drift since the crash is actually a

positive sign. He added: “The current psychological fatalism about stocks is a wonderfully bullish signal. It is human nature that people are most pessimistic or uncertain at the lowest point of the market. Only when people feel most uncertain can a bull market start.” Templeton also claims that the great bull market of the 1980s ended on Aug. 25, 1987, and that it was followed by a compressed, brutal bear market that plunged to its lowest point last October. Now, 12 months later, he says that there is little chance of another crash that will take share prices below last October’s lows. Said Templeton: “If there was going to be another panic following last October’s panic, it is unprecedented that it would wait as long as this.” At most, he said, there is only a

20-per-cent chance of a market downturn. John Kenneth Galbraith: Between the bull and bear camps are many economists who refuse to participate in guessing about the future. Galbraith, 79, the lanky Canadian-born

Harvard University economist and author of the book The Great Crash: 1929, is taking a neutral position. Galbraith published a prescient article in The Atlantic Monthly nine months before the crash, warning that the

bubble of market speculation and greed was about to burst. Drawing an analogy to economic conditions that prevailed in 1929, he said that a market rout of epic proportions was about to occur, but that it would have only limited adverse effects on the rest of the economy because of built-in government safeguards. Galbraith told Maclean’s: “The crash was only a market phenomenon. The Federal Reserve Board behaved very well.”

But Galbraith says that high-risk, or socalled junk bonds, leveraged buy-outs and other debt-oriented financial structures continue to add a high level of risk into the market. He added: “The crash had a chastening effect on

traders and investors. I have very little worry about greed now. But I am worried about stupidity—companies that are laden with debt instead of spending on research innovations.” Similarly, Galbraith said that the U.S. government will have to reduce its budget deficit with increased taxes and lower interest rates. If not, he told an audience in Tokyo last month, all of North America would suffer. Said Galbraith: “Bad economic policy, like alcoholic excess, has its inescapable aftermath. As for the future of the stock market, I will leave

predictions to the more reckless. But I believe we will have a similar financial episode about 10 years down the road.” There was also a strong pessimistic consensus in last week’s survey of 61 leading U.S. economists by Sedona, Ariz.-based Blue Chip Economic Indicators, a monthly survey of expert economic opinions. According to the survey, 89 per cent of economists polled said that the onset of the next recession would begin in 1989 or 1990. If they are right, North Americans can only hope that the next downturn is less painful than Prechter and McAvity predict. ANN WALMSLEY