It used to be the lonely bears. Now it`s the lonely bulls.
As Suresh Bhirud, chief market strategist for First Boston Corp., put it last week: ”There are perhaps 100 technicians on Wall Street, and 101 are now looking for a further correction in stock prices, which we think is not going to occur now.”
Although the stock market suffered one of its heaviest losses two weeks ago and continued to experience turbulence last week, a number of market pros are still looking for higher prices on the horizon. Bhirud goes so far as to say, ”Stock prices will go much higher before a significant correction sets in.”
But that`s assuming the economy shows some life, and most stock market prognosticators are beginning to think it won`t. Last Friday, the Dow Jones industrial average closed at 1777.98, down 3.80.
”The economic outlook is not as good as expected,” said Brian Fabbri, chief economist and investment strategist for Thompson-Mckinnon Securities.
”There`s growing apprehension that further interest rate cuts may not be enough or sufficient to turn around the economy quickly and produce the robust growth that previously was forecast.”
On Friday, Merrill Lynch & Co. didn`t help matters when it downgraded its forecast on the second-half gross national product, saying, essentially, that the economy wouldn`t grow for the rest of the year. Previously, Merrill had been expecting second-half growth of 2 to 3 percent.
Donald Straszheim, Merrill`s chief economist, cited weakness in the energy and manufacturing sectors as a reason for the downgrading.
But bulls like Bhirud aren`t swayed. In making his case, Bhirud acknowledges that the near-term earnings prospects look dismal, but he thinks they`ll look better by the end of the year. Next year`s results should be even better, he said.
Another factor is the tremendous amount of cash in the marketplace. According to Bhirud, lower interest rates eventually could lead to a significant shift to stocks from mutual fund assets, money market funds and other fixed-income instruments.
”In spite of the increased volatility that is being exhibited by stock prices, we think the basic trend is up,” he said.
John Connolly, Dean Witter Reynolds Inc.`s chief investment strategist, agrees. He believes the economy is in the midst of ”an atypically long cycle” characterized by very low inflation. These are ideal conditions for investing in financial assets, he said.
”The economy is far from topping,” he said. ”In fact, it looks more like it is bottoming. We believe it can continue to grow, at least tepidly, for a long time.”
If the bulls are right, then now is the time to buy as stock prices fall into the bargain basement. If they`re wrong, though, stocks may already be overpriced.
”The question is what is a bargain,” Fabbri said. Just two weeks before the Monday Massacre, when the Dow industrial average fell 61.87 in a single day, analysts assumed that earnings would be growing at 15 percent annually, meaning that stock prices still had a way to go. Now it appears that won`t happen, and most analysts have responded by turning thumbs down on stock prices.
Said Fabbri: ”We`re looking at a correction that has something to do with stock price valuation (based on earnings), rather than simply on some technical chart that seems to get out of whack.”
