THE DOW JONES industrial average closed Friday at 6,526.07. That's a 3.2 percent haircut for the week and 7.9 percent below the Dow's all-time high of 7,085.16, reached March 11.
The Dow's dive can be traced pretty much to one thing: inflation fears. Stock investors are afraid that the strong U.S. economy will spark higher consumer prices, which will prompt the Federal Reserve and the bond markets to drive interest rates higher
Higher rates can hurt stock prices by boosting corporate costs, by depressing demand for products and by making bonds more attractive as investments.
But inflation has not worsened.
And even if it does tick up from 3 percent annually to, say, 4 percent, some analysts aren't persuaded that corporate earnings would suffer.
Is inflation stirring? Will it hurt stocks? Is conventional wisdom right? Or is this a second chance for people who didn't buy stocks the last time they were at these levels?
@Joseph V. Battipaglia
Investment policy chief, Gruntal & Co.
My suggestion would be to stay the course. We are not entering a bear phase.
My target as we came to the end of 1996 was for the Dow to come to 7,000 in 1997. By year end, I expect the Dow to get back to where it had been, which was 7,000. Investors really have to ask themselves one question, and that is, whether we are going into a bear market or whether this is a correction in the context of a bull market. The real answer to that is to know that bear markets are brought about by one of three factors. One is a recession. A second is a credit crunch, and the third is a big, global event, like the invasion of Kuwait, that tells everyone it is time to be defensive about your wealth and about the economy.
We don't have those conditions today. If anything, the Fed is worried about too strong of an economy, so recession is not in the cards. We don't have a credit crunch, because the Fed is moving very daintily at raising the Fed funds rate.
What we've got is a correction of excess in the market. What is the excess? To me, it's the fact that investors have been buying a very narrowly described group of securities: big, multinational, large-capitalization companies. Once you started to move past the 6,000 Dow last October and run for the roses to 7,000, you have lifted the values of these stocks well beyond their growth rates.
Raymond A. Worseck
Chief economist, A. G. Edwards
The market has room to rise. Given the current economic and secular environment, the underpinnings of a strong bull market continue.
It's absolutely fascinating to me that most people who are quoted on the stock market today do it in the context of 'as long as inflation can stay down, we'll be OK.' That's a mentality that obviously has been cultivated in the last 15 years. But what the historical record shows is that there's this whole other phase of the market out there.
You hear people talk about how international markets are coming on, how Asia is an economic engine, all this gee-whiz stuff. And then they say, 'As long as we can keep our economy growing slowly and keep interest rates down, we'll be OK.' Well, those two statements are incompatible. We think the global economy in the next five years is really going to surprise people, and our stock market will share in that.
It may be, in the meantime, that we'll see some upticks in inflation. But history says the market can live with that.
Manager, Sovereign Investors Fund John Hancock Funds
I think it's a bump in the road. People four weeks ago were saying, Gee, we need a correction. It will be healthy. Now we have the correction, and everyone says, 'What's going on here? The world's coming to an end.'
We lose perspective of some of the things that have driven the market in the first place. And that is low inflation. There is this expectation that inflation is going to become a problem. Of course, we had that expectation 12 months ago and two years ago. And inflation has not reared its ugly head. This is a dangerous thing to say, but maybe it is different this time. And I happen to believe it is different this time.
The other important variable here is liquidity. There is a trillion dollars or so in money market funds. When people start talking about irrational euphoria in the stock market, my response is: What is a trillion dollars doing in money market funds? The point here is that liquidity is still ample, particularly in the corporate sector. Corporate coffers are full of cash at this point, and I know, in many cases of companies that I own, they are buying back the stock.
Where there is risk in the market, it's more on the basis of individual stocks. You have to be in those companies where you're fairly comfortable with their earnings power for the next couple of years -- where they are in good industries and they're the dominant player in their industry.
Pub Date: 4/06/97