Bull market to stay, Garzarelli predicts

Get out your checkbooks, sit back and enjoy the bulls' run for another year. That's the gospel according to Garzarelli.

Elaine Garzarelli, Shearson Lehman Bros.' acclaimed quantitative analyst, brought her sunny message of continued stock gains to Baltimore's Center Club yesterday, and included a specific prediction: The Dow Jones industrial average would reach 3,650 or above by the end of next year -- more than 12.5 percent above yesterday's close of 3240.33


"Any correction, as far as I'm concerned, is a gift [to prospective investors], and any slowdown in the economy will be met by loosening" of the money supply by the Federal Reserve Board, Ms. Garzarelli said. "So I don't think you have anything to worry about."

The Shearson analyst, who has been named to Institutional Investor magazine's all-star team of quantitative analysts for nine years in a row, gained fame by predicting the stock market crash of October 1987.


She has been bullish almost constantly since. Two years ago, for instance, at a similar Center Club lunch, she told money managers that the Dow would rise to 2,800 by the end of 1991. She was conservative then; the index climbed to 3,168.

But a year ago, Ms. Garzarelli predicted a 3,660 Dow by Christmas this year, which would be an unlikely gift for investors.

Ms. Garzarelli, who bases her analysis on a basket of 13 market indicators, said her index currently reads 83.25 on a scale of 1 to 100. A "sell signal" is 30 or below.

Her rationale for continued stock market growth revolves around four major areas:

* The business cycle. The stock market typically peaks when the year-to-year change in corporate earnings peaks, and earnings are expected to rise 16.5 percent in 1993 and 8 percent to 10 percent the next year, according to the Shearson analyst.

* Monetary policy. The Fed will not tighten the money supply -- thus raising interest rates -- unless the economy grows consistently by about 3.5 percent for several quarters, and commodity prices rise sharply at the same time, Ms. Garzarelli said. She predicted inflation will stay low -- within 2 percent to 3 percent -- for three to four years.

* Investor sentiment. The most recent survey of investment advisers shows 55 percent are bullish, which means there's still plenty of cash available to invest in stocks. Before the '87 crash, by comparison, more than 90 percent of investment advisers were bullish.

* Market valuation. The market is still far undervalued compared with rates of return from both short- and long-term bonds, according to Ms. Garzarelli.


Finally, she said, the slow but steady growth expected from President-elect Bill Clinton's economic package portends a continued bull market.