FEARS OF A MAJOR RECESSION ARE FADING AND STOCKS ARE SURGING TO RECORD PRECRASH HIGHS
THE MARKETS’ NEW OPTIMISM
FEARS OF A MAJOR RECESSION ARE FADING AND STOCKS ARE SURGING TO RECORD PRECRASH HIGHS
For devastated investors, Oct. 19, 1987, signalled more than just the dramatic end to a six-year bull market. As they sorted through the rubble of the worst stock market crash since the Great Depression, many predicted more agony to come: a further share-price collapse or even a deep depression. But less than two years later, both concerns have proven decidedly wrong. Some Wall Street analysts are now saying that the economy will continue to expand well into the next decade, while others are brave enough to suggest that North America has already pulled out of a mild recession. Late last week, stock markets seemed to justify that conclusion. The New York Stock Exchange’s bellwether Dow Jones industrial average twice briefly surpassed its record closing of 2,722.42 points, set on Aug.
25,1987, to hit 2,732.93 on Thursday and 2,747.53 on Friday before closing the week at 2,683.99 points.
Even more remarkable is the fact that the stock markets’ surge occurred largely without the support of small investors, most of whom have remained on the sidelines since the crash—now widely known as Black Monday. Instead, the markets’ rapid recovery
has been fuelled by such large institutions as pension funds, which began returning to the world’s trading floors within a few months of the crash. And now, many market analysts say that individual investors, as well, will quickly start moving more money into the markets. According to those analysts, individuals’ newfound confidence, combined with continued economic growth, could push the Dow to 3,200 by mid-1990. Philip Gilbert, a financial adviser with Midland Doherty Ltd. in Toronto, said that the market is moving higher because consumers are spending as if they believe that the much anticipated mild recession, or so-called soft landing, is going to be even softer than predicted. And some analysts say that it may already have occurred. Declared Gil-
bert: “People are happy and spending money.”
Some signals of a possible recession still remain in the financial district of Toronto’s Bay Street, where a few forecasters are predicting that a downturn will occur early in 1990. They said that the Bank of Canada’s high-interestrate policy and—to a lesser extent—the federal government’s new consumption tax may be damaging the Canadian economy in the long term. One indicator is that first-quarter spending on tourism in Canada is down by 5.2 per cent from last year, a common indicator that consumers expect a slowdown. As well, high interest rates in Canada could eventually dampen the performance of the Toronto Stock Exchange (TSE), which has been following its New York City counterpart back to its precrash record. Last week, the TSE 300—an index of leading Canadian stocks—closed at 3,996.35 points. That approached its all-time record of 4,118.94 set in August, 1987.
As consumers in Western industrial countries continue to spend—although at lower rates—leading Wall Street analysts predict that the European and North American economies will continue to expand gently and that stock markets will continue to climb. That optimism has led some investment firms to alter their recommended strategies. John Con^ nolly, for one, chief investment strategist with Wall Street’s respected Dean Witter Reynolds § Inc., said that last week his company £ decided to revise its I
RETURN OF THE BULL MARKET The Dow Jones Industrial Average
SOURCE: DOW JONES & CO. INC.
“model portfolio” from a previous recommendation of 48 per cent bonds, 48 per cent stocks and four per cent cash. The new mix, Connolly said, calls for 75 per cent of a client’s funds to be invested in stocks and 25 per cent in bonds. His company, Connolly says, is anticipating that the Dow will hit 3,200 by next summer.
Like many other firms,
Dean Witter Reynolds has decided that consumer spending is the key economic indicator to watch. And outside of tourism, such spending shows no sign of declining sharply. Instead, Connolly said that the economy is undergoing a “lengthy” but gentle slowdown. He predicted that the slowdown will not blossom into a full-fledged recession. A recession is generally defined as two successive quarters of negative economic growth. Said Connolly:
“It’s hard to see a consumer collapse, so we’ve ruled out the possibility of a sharp economic decline.”
Slower but continued economic expansion has also led some analysts to conclude that the United States has already pulled through an extremely mild recession. As a result, the almost-invisible downturn has dampened consumer spending in some areas—including home purchases—but other sectors of the economy have expanded. Said Connolly: “We think time is running out on the recession thesis. Our point is that we’ve been in a mild slowdown for a long time. The savings rate for consumers has gone up to 5.9 per cent. So it’s getting harder and harder to see how you can have a bad recession.”
Experts who study business cycles—the movement of the economy through recession and growth periods—are also expressing optimism. Anirvan Banerji, an economist with Columbia University’s Centre for International Business Cycle Research in New York City, said that despite some signs of weakness in the economy, the leading indicators, including consumer spending and company allocations for new plants and equipment, are strong. He added: “There is not really any significant weakness in any of the indicators. The signs just don’t add up to negative growth.”
In addition to consumer spending, the Dow, say analysts, is benefiting from declining U.S. interest rates and inflation, which has been easing for the past four months. Said Walter Murphy, senior market specialist at Merrill Lynch in New York City: “As long as interest rates stay down, stocks will do all right.” And Banerji added that there is good reason to believe that economic
growth will continue. He said that government action to hold inflation in check by raising interest rates has worked. He also noted that since the end of the Second World War, recessions have continuously become shorter than expansions, and that before the war, they were about equal in length.
Canadian economists are currently more conservative in their outlook than their American counterparts, and most are still predicting that a recession will occur some time in 1990. John Grant, chief economist with Wood Gundy Inc. in Toronto, says that if Bank of Canada Gov. John Crow is forced to keep interest rates high to battle inflation, the Canadian dollar will also remain high. As a result, Grant added, the TSE 300 may cease to perform as well as the Dow. He also noted that the high Canadian dol-
0 lar hurts the profits of Cana-
1 dian exporters because the x prices of their products in ° foreign markets climb in tandem with the dollar.
Grant said that higher Canadian interest rates also send a negative message to foreign investors shopping for shares in Canadian companies because they associate higher rates with a weak economy. He added that the longer Canadian rates stay higher than U.S. rates, the more depressed the Canadian economy will become. And a depressed economy will ultimately cut into company profits. Said Grant: “Investors would assume that high interest rates and a high Canadian dollar could erode confidence in the nation’s economy and hurt share values.”
Many economists said that the federal government’s new consumption tax—described in detail for the first time last week—will also hurt Canada’s short-term economic outlook. They added, however, that there will be no lasting negative effect on the economy. Finance Minister Michael Wilson projects that inflation will increase by about 2lA per cent at the time that the tax is introduced in 1991. Grant said that the real increase may be closer to three per cent because price and wage bargaining will be fierce. To counteract the tax’s inflationary effect, Crow has indicated that he is prepared to accommodate the 2 lA per cent in his interest-rate policy.
Meanwhile, Canada’s small investors appear poised to return to the stock markets. Said John Bart, president of the Canadian Shareowners Association: “We might be just beginning to see the re-emergence of the individual investor into the stock market.” And if small investors do return, world stock markets could soar to even greater heights.
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