Lehman strategists see Fed easing, market rally
by Stewart Winograd
Stocks Editor
Jeffrey Applegate, chief investment strategist at Lehman Bros., is
recommending an asset allocation of 80% stocks, 20% bonds, and 0% cash --
the most bullish of 14 portfolio weightings recently reported by top Wall
Street strategists.
"We expect the Fed to ease the Federal Funds rate by 75 basis points in the
next 12 months," Arum Kumar, senior equity strategist at Lehman Bros. and an
associate of Applegate, told DTN Wednesday.
Kumar said Lehman Bros. expects one easing of 25 basis points in the
Federal Funds rate in the fourth quarter of 1998 and two more in 1999.
(A basis point is 1/100th of a percentage point.)
"The 30-year bond yield should fall to 5.0%," Kumar said. On Wednesday,
the 30-year yield was 5.27%.
"Given that scenario, we think that price-earnings multiples can get to 22,
based on forward earnings, by the end of this year," Kumar said.
"Using that target, we expect the S&P 500 to reach 1150 by the end of the
year, and 1250 by year-end 1999," Kumar said. "Equivalent prices are 9000 for
the Dow industrials by year-end, and 9700 in 1999."
"Therefore, expected returns between now and the end of the year are 15%
for stocks, 3% for bonds, and about 2% for cash," Kumar said. "Based on that,
we recommend that investors be heavily weighted in stocks," he said.
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