MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY, DECEMBER 30, 1997 (2)
INSIDE THE MARKET
Santa Claus rally may be short lived
By PATRICK BLOOMFIELD
Santa Claus is now dropping off his goodies in North American stock markets. He may even stay around for a while. But, if you care to hear what might happen next:
* The grinch will steal North American stock markets all over again;
* Bonds will continue to give a better bang for the buck than stocks;
* Investors will need to adjust to a whole new investment climate.
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Forget the squeaks of concern over the purportedly inflationary pace of the U.S. economy. The name of the game in the year ahead, and probably for some years longer, will be disinflation - the final slaying of the inflationary dragon that has long governed our behavior.
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You could even use that nine-letter word called deflation, being declining, rather than rising, prices for many of the manufactured goods we buy, influenced by an inflow of cheap merchandise from Asia.
That means the manufacturers who make those same goods on this subcontinent will have to chop their profit margins some more and investors will have to lower the profit expectations they have already built into current stock prices - a process usually achieved either by lowering stock prices or keeping them where they are until profits catch up again. That is the bad news for stockholders.
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The good news from the annual look-ahead special issue from the people who put out the Montreal-based Bank Credit Analyst group of financia publications, is that a long, long bear market is unlikely. In time, stock markets could well achieve new peaks.
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I am well aware that I have quoted BCA editor-in-chief Anthony Boeckh and his colleagues more frequently in the year past than any other group of commentators. I have done so with the excellent justification that they have been right more often than wrong. They were among the early birds to talk about the "long wave" in our economies, which they define as technology-led upturn in productivity and sound macro-economic policies. Hence their conviction that, given an absence of future policy blunders, the long upwave in stock prices should still have some way to go.
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More to the point, they grasped the significance of the Asian turmoil from the beginning, advising what has since proved a profitable shift from stocks to bonds. ÿAnd, for many months now, they have been stressing that Wall Street stock-prices already discounted the potential benefits of that above-mentioned long wave. ÿRight now they foresee a period of increasingly tough competitive pricing "as a flood of cheap Asian goods hits world markets," leading to "mediocre" stock-market returns over the year ahead, especially relative to bonds.
If they are right, why the current cool talk that the worst of the financial turmoil is past? ÿThe answer is that those who give such comforting words are interpreting the crisis as a temporary loss of investor confidence - without significant economic fallout. Once the International Monetary Fund has restored confidence, all will be hunky-dory again.
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Boeckh and Co. differ in that, from the beginning, they regarded the Asian turmoil as confirmation of their concern that a glut of excess manufacturing capacity has been building in that part of the world. ÿThey talk of spillover effects on major national economies, especially Japan.
While cheaper Asian imports will boost consumer spending power in those economies, that effect will be dominated by weaker export growth. In sum, they can envisage global economic growth slowing next year, from around 4% to, maybe, 2.5%. ÿTo put that forecast decline in perspective, the 1990-91 global slowdown (the starting point of the tough times of the early 1990s) was from around 4% to 2%. That, of course, would be bad news for employment levels and good news for bond holders.
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More than that, it could trigger an uncoupling of bond and stock markets that was already foreshadowed in the stock-price declines of August and September. ÿAs for those of us sliding our way through northern snowstorms, the BCA view is that the Asian shock is likely to chop at least half-a-percentage point from our Canadian gross domestic product growth, both directly and through lower commodity prices. (The U.S. market, which absorbs 80% of our exports, will also slow.) Boeckh and his colleagues are talking of the likelihood of 3% growth in
1998.ÿEven at that level we could be the only major economy to grow above trend.
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