something to think about
Sunday August 29, 3:20 pm Eastern Time
Bay Street Beat: 1987 all over again?
By Sarah Edmonds
TORONTO, Aug 29 (Reuters) - Lofty oil prices, a weak U.S. dollar and rich stock market valuations have some Canadian
economists drawing parallels between 1999's euphoria and the giddiness that led to the Black Monday stock market crash in 1987.
But other strategists remain convinced that North American equities are in good health, nourished by strong corporate earnings
growth, a global recovery and market liquidity provided by investment-hungry baby-boomers.
However, even the more bullish say it is unrealistic to expect the market's rise to continue at the same blistering pace of the past few
years.
Douglas Porter and Robert Spector, both economists with brokerage Nesbitt Burns, have put together a report called ``Echoes of 1987'.
In it, they discuss how the rebound in global growth, rising bond yields, a recovery in oil prices, the surge in the U.S. trade gap, the slide in the U.S. dollar and the high
equity valuations of this year could all be found in the run-up to the painful reversal in October 12 years ago.
``I guess the comment I would make is that the market is very richly valued -- this is dealing with the U.S., Canada probably (is) a little less so,' Porter said in a
telephone interview. ``And it looks like the Fed will continue to tighten and that's not a very pleasant combination for the equity market.'
While Porter views the equity market as a vulnerable to damage from any reversal in sentiment, he too believes that strong liquidity, relatively low inflation and the U.S.
market's leadership in the world would mitigate any bad spell.
``If you were to look at differences and similarities -- yes, the equity market has had a big run-up. But the other differences I think are that I'm not expecting oil prices to
move much from where they are now. I think at $20 a barrel, oil is quite stable,' said Subodh Kumar, chief strategist at CIBC World Markets.
"While inflation will pick up, it won't go up to massively higher. And the lower U.S. dollar, in my opinion, is good for U.S. companies because it makes them more
competitive. So if Asia and Europe are picking up, the U.S. dollar is low and the U.S. economy moderates, then...the U.S. trade deficit should narrow not widen.
``So it all depends on how you see the global economy, whether you see the glass as half-full or half-empty,' Kumar added.
As for interest rates, while he didn't rule out another tightening by the U.S. Federal Reserve this year following last week's 25 basis-point rise, Kumar said that even
another 50-basis point hike would be unlikely to destroy earnings momentum.
``If they raise them by 100 basis points -- which is what I'm looking at -- and the Fed's already done 50, that doesn't really kill the business cycle. It tends to cool down
the economy but not drive it into recession.'
Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri, is also firmly in the ``1999 is different' camp. She pointed out that the oil price surge has
been far greater this year than in 1987 and adds that oil's rebound was not therefore one of the probably triggers of the 1987 market rout.
She said bond yields, which are the number one explanation offered for the crash, have not risen nearly as much this year as they did in 1987. The Nesbitt report agreed
that this is the case -- with a 300-basis point increase in 1987 versus only about 100 basis points in the long end this year.
It added that the U.S. government's drive to ``spend the surplus' in the current environment could put further upward pressure on rates.
``Bond yields are still very low in terms of what we've experienced over the last 20 years or so.'
Nor is inflation as horrifying a boogeyman as it was in 1987, Warne said.
``I think there really was a fear that inflation would resurge (in 1987). Remember we'd just gone through this period of double-digit inflation rates,' she said.
Short-term blips, like the unhappy mood which gripped Wall Street Friday, are impossible to escape, said CIBC's Kumar. However, a bear market is not snarling in the
wings.
``I think the health of the markets overall is good. I wouldn't consider it perfect any longer, like it was earlier this year, where basically every factor that you'd want to be
positive, was positive,' Warne said.
On Friday, the Dow Jones Industrial Average lost 108.28 points, or 1 percent, to close at 11,090.17 as traders fretted about comments from Federal Reserve Chairman
Alan Greenspan on asset valuations.
The Fed chief startled the markets, knocking stock indexes into negative territory, with his comments that central banks must consider the prices of stocks when setting
monetary policy, signaling a growing focus on the equities market. |
