END OF THE BULL SESSION?Most strategists, although wrong in '96, again expect stocks to rein in their run
Market mavens are nursing a bad case of whiplash. Most of the 42 strategists surveyed by BUSINESS WEEK a year ago saw their yearend forecasts surpassed within the first few months of 1996. The consensus view then was for the Dow Jones industrial average to rise 5% and end the year at 5430. But the Dow passed 5430 in early February and is 838 points higher, at 6268. The Dow's 1996 gain: 22.5%.
Only three strategists in last year's survey even predicted that the Dow would reach 6000. Just one of those three, Dain Bosworth Inc.'s technical analyst, Robert F. Dickey, forecast a Dow that would top 6000 (page 82). One year later, forecasts for the Dow range from 4400 to 7500, with the average calling for a Dow at 6587 by the end of the year--a gain of about 5%. The Standard & Poor's 500-stock index is expected to do slightly better, gaining 6.2%. The NASDAQ Composite index, however, is projected to end 1997 with an underwhelming 3.2% gain.
The prospect that earnings growth will slow weighed down many 1997 market forecasts. ''What's been driving the stock market is earnings, and if earnings appear to be coming down in 1997, the stock market will come down, too,'' says Richard Davis Jr. of Dallas-based Rauscher Pierce Refsnes Inc. Davis thinks that after rising 7%, to 6800, by midyear, the Dow will slide to 6000 and end the year down more than 4%.
A double-digit drop is expected by Michael Metz, market strategist at Oppenheimer & Co. Metz looks for a 12% fall to bring the Dow to 5600. ''I think we're going to see a serious erosion in profit margins,'' he says. Metz has been waiting a while for falling profits and rising rates to drag down the Dow. ''I've been wrong most of the year, and I've been 40% in cash,'' he notes. A year ago, Metz expected a Dow of 4805 by yearend 1996. Salomon Brothers Inc.'s David Shulman also expects the Dow to tumble. ''Our view is for earnings to grow at 5% and for interest rates to be modestly higher,'' he says. ''That's an environment for quite a bit of disappointment.'' Shulman envisions a Dow of 5750 by yearend.
''MANIC EUPHORIA.'' Some market seers paint an even gloomier picture. Herzog, Heine, Geduld Inc.'s David B. Bostian Jr. calls for a bear market. ''Manic euphoria has won out over rationality,'' he says. ''It may hold out until the end of the quarter, or the end of the year, because of mutual-fund money flowing in.'' Bostian thinks that a lot of the profit gains that have now become the bogey were helped by nonrecurring restructurings. ''Companies can't raise prices, so if costs start creeping up, margins will get squeezed viciously and companies will cut prices to retain market share,'' he says. Bostian thinks the Dow will plunge to 4550.
In the bullish camp, Prudential Securities Inc.'s Greg A. Smith is bellowing the loudest. He figures that strong money flows into equities and a worldwide economic script of ''modest growth with very modest inflation'' will help send the Dow up almost 20%. Federal Reserve Chairman Alan Greenspan's recent questioning of whether there was ''irrational exuberance'' in the stock market has Smith nervous, however. ''My concern is that if Alan Greenspan and the rest of the Fed consider the stock market's ebullience irrational, they could try to do something about it,'' he says in a recent report.
ROTATION. Double-digit gains are also forecast by Robert S. Robbins, market strategist at Robinson-Humphrey Co. in Atlanta. He just raised his 1997 ceiling for the Dow from 6500 to 7400. Robbins expects inflation fears to moderate due to an economic slowdown and expects earnings to clock in at about 7% to 8%. A Dow of 7050 is forecast by one of 1996's most vocal bulls, Abby Joseph Cohen of Goldman, Sachs & Co. ''I'm expecting stock prices on the major indices--the S&P 500 and the Dow--to increase roughly in line with earnings,'' says Cohen.
Many strategists are feeling jittery after the bull's long run, but the average allocation going to stocks--63.7%--tops the 61.5% that market mavens recommended last year. Meanwhile, the allocation to bonds has dropped from 29.4%, to 24%. And cash has been jacked up to 12.3%, from 9.1%.
Sluggish stock prices would make picking the right stock sectors even more crucial in 1997. ''The most money to be made in the stock market next year will come from group rotation rather than a market move,'' says Rao Chalasani, chief investment strategist at EVEREN Securities Inc. The favored sectors for 1997: technology, energy, and financials.
The tech sector was also a favorite a year ago. In fact, four of the six best-performing stock picks in last year's survey were tech stocks. The grand prize goes to McDonald & Co.'s Jerry Dombcik: As of Dec. 16, Dombcik's pick, Brightpoint Inc., a distributor of cellular telephones, was up about 160%. The worst-performing stock was Glenayre Technologies Inc., the choice of First Albany Corp.'s Hugh Johnson, which lost 47.3%. More than a third of the gurus in last year's survey beat the S&P 500's 17% gain, and close to a third beat the Dow's 22.5% gain.
The stock market's advance has been concentrated in big blue chips, but a number of strategists say that small-cap stocks could outperform large caps in 1997. Cohen expects the NASDAQ index to rise to 1475 because of ''somewhat better earnings'' and because small caps' relative underperformance in 1996 means they may catch up with large-cap stocks in the coming year. Janney Montgomery Scott Inc.'s Eugene E. Peroni Jr., however, feels that ''there is too much fear and loathing'' in the market for small-cap stocks to participate in the stock market advance he forecasts for the latter half of 1997. ''It will still be the 'Nifty 50' stocks that advance,'' he says. ''People will still seek perceived safety and liquidity.''
In 1996, the stock market roared past the consensus forecast for the second year in a row. At this juncture, the risk of a correction is certainly greater than it was a year ago. But investors should keep in mind that the pessimism among top strategists may be overdone.
By Suzanne Woolley in New York
Updated June 13, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.