Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: GROUND ZERO™ who wrote (4521)	12/31/1997 11:21:00 PM
From: Chris	Read Replies (1) \| Respond to of 42787

briefing.com Stock Brief <Picture> ------------------------------------------------------------------------ Outlook '98 Daily commentary updated for January 1-2, 1998 The year-ahead outlook is as much a part of the New Year's tradition as Dick Clark, a bottle of bubbly and Auld Lang Syne. Who are we to part with tradition. So for what it's worth, here is Briefing's year-ahead outlook for the market. Earnings The driving force behind the market's three-peat (3 straight years of 20%+ gains) has been the dynamic growth in corporate earnings. Can corporate America post another year of double-digit earnings growth? Or will the deepening financial crisis in Asia and the corresponding dollar rally put the brakes on growth? Briefing contends that the latter scenario is more likely. Slower than expected growth from the Asian region, a lack of pricing power (made worse by cheap imports out of Asia) and the strong dollar will make it difficult (particularly for the large multinationals) to live up to the market's inflated expectations. As of this writing, the street expects year-over-year earnings growth in Q1 of 15%-17% - up from 8% in the Q4. We believe this rate to be too high. The preponderance of earnings warnings from a diverse group of stocks over the past month lends support to our view. Should the street be forced to guide its Q1 estimates to the 10%-8% range (as we suspect), the market is in for another broad-based correction. While we think the market is ripe for an early year setback based on inflated earnings expectations, we are not saying that the indices can't end the year higher. But another year of 20% gains is out of the question. Inflation Low inflation has also been a key factor in driving the market higher over the past several years, as low inflation leads to higher multiples. Despite a very strong domestic economy with full employment, the inflation outlook for 1998 looks good (1.5%-2.5%). Asia's financial crisis is at the heart of this forecast. Assuming the crisis doesn't get much worse, domestic GDP should slow by no more than 0.50%. But if the crisis spreads to China, Russia, Brazil, etc., GDP growth could slow by as much as 1%. The one area of concern on the inflation front is wages, as the tight labor market translates into increased wage demands. If our assumptions are right and we get pricing pressures (due to cheap imports from Asia) combined with wage pressures, it will make it very difficult for corporate America to grow earnings above our forecasted 7%-10% range. Rates Long-term interest rates are the third cylinder in the growth engine. At 5.92%, the yield on the 30-year bond is near the low-end of its historic range. Can it go much lower? Probably not. The most recent drop in long-term rates has been driven by a flight to quality given unrest in Asia. But as the Asian crisis subsides and the bond reverts to trading on economic fundamentals, it seems unlikely that rates will drop below the 5.75% level - even after importing disinflation from Asia. Solid GDP growth, tight labor conditions and an election year in which budgetary constraint is likely to give way to talk of additional tax breaks and increased spending all point to steady to slightly higher interest rates (7.0% capping the upside). The relatively stable rate environment should put a reasonable floor under the equity market, thereby preventing anything deeper than a 15%-20% correction. Liquidity The fourth cylinder in the growth engine has been liquidity, as small investors continue to pour their IRA/401K/bonus money into the market in order to save for retirement. Given the market's tremendous rally over the past 17 years its no wonder that stocks remain the vehicle of choice for most investors. U.S. stocks look particularly attractive in light of events overseas. Considering the longer-term time horizon of most small investors (retirement, college education), we are unlikely to see a significant shift away from equities. However, as the baby-boomers reach their early-to-mid-50s (as is just beginning to happen), look for a gradual shift out of equities into more conservative fixed income investments. Politics A discussion of the political backdrop is important in that 1998 represent a key election year. Republicans are fighting to increase their majorities in both houses of Congress and are likely to succeed, though the number of seats gained should be modest. More important than the outcome of the elections will be their tone. Increased talk of tax cuts, spending increases and trade barriers may play well on Main Street but Wall Street won't be impressed. To the contrary, anxiety over the election outcome should keep the market from enjoying a typically strong summer rally. Conclusion The streak of 20%+ annual gains will come to a close due to slowing earnings growth . At best we see the S&P 500 testing the 1150.00 mark, or 18% above current levels (based on earnings growth of 10% and a p/e of 23). On the downside, we see risk to the 825 area, or -15% (based on 7% earnings growth and a p/e of 17). Finally, we predict that the Chicago Cubs will not win the World Series (wanted to make sure we got at least one thing right). From all of us to all of you - Have A Happy & Prosperous New Year! [ Index ]