Taking Stock of World Markets

Article excerpt

While the U.S. stock markets went on a bender this summer in anticipation of a weaker economy and falling interest rates, European bourses await their turn, and Japanese stocks bemoan the recovery that never was.

U.S. stocks made big headlines in the first half of 1995, and why not'? The Standard & Poor's 500 stock index kept hitting new records, gaining 26% from December lows to late June highs. when the September futures contract peaked just over the 556 level.

Hostile takeover bids for Lotus and Chrysler made great stories, but traders were more likely to be reading the speeches of U.S. Federal Reserve Chairman Alan Greenspan. Greenspan did mention the "R" word (recession), but the Fed's June Beige Book said the economy was running at a high level. For a market already banking on a Fed rate cut, the stakes are high.

Yet whichever way the Fed goes, stock prices may keep moving on up. Dennis Genetski, an analyst at Robert Genetski & Associates Inc. in Chicago, remains bullish on the S&P short term and in 1996, when he sees the index rising 15%. This comes despite his belief the Fed will raise rates again this year.

"The Fed Fund increases will be rocky, but [capital gains] tax breaks will offset this," Genetski says.

The S&P could hit 575 by year-end and 612 next year, says Arnold Moskowitz, chairman of Moskowitz Capital Consulting in New York. The first reason is a lackluster U.S. economy Moskowitz figures to grow only 1.5% in the third and fourth quarters, forcing the Fed into a 100 basis point rate cut. For 1996 he expects gross domestic product (GDP) growth to pick up again to the 2.8% to 3% level, while earnings, up 15% year-to-year in 1995, grow another 10%.

A second reason for his bullishness is Moskowitz expects the dollar to rally by 10% in the next year. "A lot of international investors are underinvested in U.S. dollar instruments," he says, adding any stock market correction this year should be minor, no more than 5% or 6%.

Gerald Appel, editor of Systems and Forecasts in Great Neck, N.Y., sees choppy markets and a probable sell-off this summer but no evidence the bullish trend is at an end. Price-to-earnings ratios aren't out of line, and as long as the market thinks Greenspan might cut rates (an assumption largely factored into the market), it's as good as the real thing.

It would take five or six weeks of weakening markets to set off warning bells for U.S. stocks, Appel says, including falling numbers of advancing stocks or ratios of stocks making new highs to lows.

Speaking for the bearish camp, both the Japanese and U.S. stock markets appear vulnerable to Gary Shilling of A. Gary Shilling & Co. in Springfield, N.J. "U.S. stocks are expecting everything to go perfectly well." he says, that is, a soft landing leaving corporate profits intact. Yet Shilling thinks the U.S. economy is close to recession and its stock market ripe for a major sell-off of the 30% to 40% variety.

From a technical analysis point of view, Glenn Neely of the Elliott Wave Institute in Laguna Beach. Calif., expects the 560 level (basis cash) to hold as the S&P's high watermark in 1995. Neely says the index is starting to get top heavy and should break to at least 530 and possibly 450 by early 1996 -- a 20% correction.

Japan (S)Inc. No news is good news in Japan of late where the Nikkei 225 stock index has lost 26% of its value since January. (Nearby futures dipped below 15000 repeatedly in late June.)

Although not technically in a recession, Japan narrowly averted a second consecutive GDP quarterly decline in the first three months of 1995. It did, however, experience its third straight quarter of deflation, thanks to the strong yen.

Virginia Parker, Ferrell Capital Management's managing director, says that given Japan's troubled economy, "the question is whether Japan will implode. …