The end of the world as we know it
NEW YORK -(Dow Jones)- The chief market analyst at Merrill Lynch
& Co. says investors should brace for a possible severe correction
in the U.S. stock market next year.
Merrill Lynch analyst Richard McCabe said the market could be vulnerable to a cyclical decline in 1998, which could bring the
major averages down as much as 25%. A correction of that magnitude would pull the Dow Jones Industrial Average, now around 8,000,
down to around 6,000.
The correction, however, will lay the groundwork for the next
cyclical bull market, which should start in late 1998 or early 1999.
McCabe spoke at a press conference at which Merrill Lynch analysts provided their 1998 economic and investment forecasts.
McCabe said that before the onset of the correction, U.S. equity
markets will likely reach new highs either in the final weeks of
this year or early next year, as stocks near the end of a four-year
cyclical bull run.
McCabe referred to the turbulence in Asian markets and the October
sell-off in domestic markets as a "warning crack" that the current
bull market is nearing its end.
"It's a wakeup call," he said. "Markets are like trees. They don't
grow to the sky."
In its published forecast for next year, Merrill said the global investment scene next year will be dominated by low inflation,
declining interest rates and slower growth. "Asian growth is about
to slow sharply and the Asian crises will ultimately slow the
entire world economy," Merrill said. "For investors, the key will
be to find sources of growth in a slowing economy."
The brokerage firm said restructurings and consolidations will
prove to be major sources of earnings growth for most companies.
Industries in the throes of consolidation include:
airlines, financials, selected energy, capital goods and CATV
companies,it said.
In the U.S., GDP growth is expected to slow to about 2.5% during
1998 after jumping nearly 4% during 1997, Merrill predicted. "The
Asian crises should reduce U.S. growth by about half a percentage
point next year, or more," it said. "The transmission mechanism
is the U.S. trade balance, which will deteriorate sharply as
exports slow." Asia accounts for nearly 30% of U.S. exports.
Merrill said it is recommending higher quality stocks and bonds
for investors around the world and believes that the two areas in
the world that can accept foreign investment and grow are Eastern
Europe and Latin America. In the U.S., financials and other bond
substitutes like real estate investment trusts are favored, as
well, it said.
Merrill's chief economist, Bruce Steinberg, said the U.S. economy
was beginning to moderate even before the Asian crises could affect
growth. "In particular, consumer spending appears much softer in
the fourth quarter than earlier this year," he said. Steinberg
expects the slowdown in spending next year will be concentrated in
consumer durables, particularly vehicle buying, where pricing is
likely to weaken.
Steinberg believes the U.S. inflation rate will continue to ease
next year, with the Consumer Price Index rising less than 2% and
prices for consumer goods declining. Steinberg's inflation view
is predicated on economic growth moderating, capacity expansion
accelerating, and import prices declining. He believes that the
Fed will probably ease next year and bond yields could fall as
low as 5.5%, from their current level just under 6%.
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