he Coming Week: Market Struggling
to Break Out
By Justin Lahart
Senior Writer
5/29/98 5:36 PM ET
Indications are that, after its hard-driving rally in the first
part of the year, the stock market has run into the horse
latitudes a little earlier than usual.
Recent action -- choppy and range-bound in thin volume,
overly sensitive to program trades and movements in the
futures market -- looks more like late August than late
spring. Along with the concerns that have dogged it in its
more morose hours this year -- Asia and earnings -- Wall
Street will enter the coming week wondering what it will
take for the market to break out of the range defined by its
April top and its April bottom. Most strategists' outlook is
enough to send you with pail and shovel to the beach until
Labor Day.
"Valuations are too high," said Hugh Johnson, chief
investment officer at First Albany. "There are two ways to
resolve it. One is the market goes sideways for a very long
time or it goes down quickly in a short time. Or -- and I
think this is what we're seeing -- there is the combination
of the two." Indeed, that's what things have looked like
since the April top -- a drifting market coiling downward.
Lovely if you're a day trader, but unsettling for other folk.
"I'm still of a mind that this is an ongoing bull market, that
this is a pause or correction in an ongoing bull market, but
we're going through a period here where it may be a rocky
road," said Johnson. "Call it a correction, call it a range,
call it whatever it is. We'll just have to wait until the
speculative excess is no longer in the market."
This all assumes, however, that the paucity of
market-moving news -- news not of the Indonesian or
Indian, but of the merger-and-acquisition variety -- will
continue. Range-bound, sure. But if Steve Lipin has a
busy weekend of writing, all bets are off.
Assuming none of the kinds of deals that increase David
Faber's airtime, market watchers will likely be doing a little
more nail-biting over second-quarter earnings. First Call
reports that analysts' consensus year-on-year growth
estimate for the S&P 500 have slipped to 5.7%. Given the
chatter coming out of Wall Street lately, it will likely be
worse than that. Which raises the old question: Is the bad
news already in the stock market? With everybody griping
about second-quarter earnings, it seems that, as in the
first quarter, Wall Street may be setting up an easy hurdle
to hop over.
The market's other, and really more worrisome, concern is
Asia, specifically Japan.
"To me the major risk out there is Japan and the
implications of Japan continuing to pursue a policy mix
that ranges from botched to inept," said Jeffrey Applegate,
Lehman Brothers' bullish market strategist. "If you look
at Japan today, wages are falling, prices are falling,
demand is falling, profits are falling. There is no generally
agreed-upon definition for a depression, but they're skirting
it." Applegate found a recent trip to Tokyo unnerving. "I
found it surreal. You're watching this epic destruction of
wealth unfold and everybody's just watching the movie and
nobody's doing anything about it."
The risk, he says, is that Japan's economic-policy
paralysis continues, leading to a more serious downdraft
on the yen. That could put renewed pressure on Southeast
Asian economies and currencies, sending the region's
markets into another free-fall and rocking global bourses.
Said Applegate, "That's the worst-case scenario, which is
not a high-probability scenario. If you're thinking about what
you need to worry about, the main thing you have to worry
about is Japan."
Next week's economic reports include some real
bell-ringers -- the May National Association of
Purchasing Management survey on Monday and the
May employment report on Friday. But the resurgence of
Asian concerns means that economic data, whose
importance was re-established in late April after various
leaks about the Fed moving to a tightening bias, are on the
Treasury market's backburner again, according to Tony
Crescenzi, chief bond market strategist at Miller Tabak
Hirsch.
"It's just like before," said Crescenzi. "The market didn't
care about economic news because it had Asia to hang its
hat on. That's what's happening again. Strong news hurts
less than weak news helps."
Much of the bond market's focus in the coming week,
Crescenzi believes, will be centered on an event that
doesn't come until the following week: Fed Chairman
Alan Greenspan's testimony June 10 before the Joint
Economic Committee. The topic: U.S. monetary policy
and the current economic outlook. "There it is," said
Crescenzi. "It's going to tell us about everything."
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