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Archive for Sunday, March 29, 1992

BROKERS EXPECT MARKET TO PICK UP STEAM

March 29, 1992

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The stock market's lukewarm performance so far in 1992 isn't alarming local stock brokers who say Wall Street is just waiting for definitive economic news and first-quarter corporate earnings reports before making a move.

"The Dow has been trading in a very narrow, tight range," said Garth Terlizzi, branch manager and broker at LPL Financial Services. "What's happened since the first of the year is the market's really been on hold."

The Dow Jones average of 30 industrial stocks, which started 1992 around 3,200 and topped 3,300 in mid-February, closed Friday at 3,231.44. A year ago, the Dow stood at about 2,915.

Despite the absence of decisive moves in the market during the first quarter, Terlizzi and two other local stock brokers say they think the stage is being set for the Dow to take off later this spring.

Harley Catlin, local broker for Edward D. Jones & Co., said he thinks the Dow will end 1992 in a range of 3,700 to 4,000. Steve Edmonds, branch manager for Piper, Jaffray & Hopwood, believes the Dow will be at 3,500. And Terlizzi pegged his year-end prediction at 3,700.

TERLIZZI said conflicting signals in economic news, which have vacillated between omens of recovery and a renewed slump, as well as a slight increase in interest rates, had temporarily sapped momentum from the market.

But that's not all bad, he said. "The longer this trading range continues, generally speaking, the better it is for the market. It kind of develops a base there."

Technically, the market is consolidating the value it gained prior to the current plateau, Terlizzi said. He noted that some market forecasters believe the end of the first quarter will bring a correction that could knock the Dow down to about 3,100.

However, Terlizzi said he belongs to the dissenting camp. "I think one would have expected a strong move by now," he said.

Instead, he believes the market will begin to rise next month, if two factors are present.

FIRST, interest rates must maintain current levels. Although increased demand for housing and mortgage refinancing activity have boosted the rate on 30-year Treasury bonds from about 7.5 percent to 8 percent since the first of the year, Terlizzi said it's unlikely the Federal Reserve Board would tighten interest rates in an election year.

"If the Treasury bond got up to 8.5 percent, I'd be extremely cautious," he said.

The second variable is first-quarter corporate earnings reports, which will begin emerging in mid-April.

Terlizzi said strong earnings, particularly reports that exceed analysts' expectations, would give the market the green light. However, a poor showing could produce a correction of anywhere from 5 percent to 7 percent in the Dow, he said.

CATLIN SAID he was betting on good corporate earnings followed by growth in the market.

"We're going to have tremendous corporate profits that are going to make the market so strong," he said.

If that prediction comes true, and inflation stays in check, Catlin believes the Dow will end 1992 "higher, much higher."

However, Catlin emphasized that although the market's potential in 1992 is good, the real opportunities in the market will be over the next three to five years.

He referred to the U.S. Office of Management and Budget's 1991 year-end review and said he expected interest rates to near current levels through 1997, inflation to remain in a range of 3 percent to 3.5 percent for the next five years, and the unemployment rate, which is now 6.9 percent, to drop to 5.3 percent by 1997.

WHAT WOULD really give the market a kick, Catlin said would be passage by Congress of a capital gains tax reduction. President Bush's proposal not only would reduce the tax rate on investment profits but also would end double-taxation of dividends.

Catlin also predicted that Congress would remove the income restrictions on individual retirement accounts to return IRAs to the universal attractiveness they enjoyed before the Tax Reform Act of 1986.

"And then hang on because it will really be going," Catlin said of the market.

Despite the potential for growth a few years out, Catlin said his forecast that the Dow could go as high as 4,000 in 1992 wasn't unrealistic.

"It may not make it but it sure isn't going to be down," he said.

EDMONDS, THE least bullish of the three with his prediction that the Dow would move to only about 3,500 this year, said he thought it was likely the market would slow down some after its outstanding performance in 1991.

Last year, he said, the average equity mutual fund increased its value 30 percent and smaller-company stocks generally saw an amazing 40 to 50 percent increase in values.

"It's the best of all worlds," he said, noting that interest rates are low and the economy is moving into a recovery.

However, Edmonds said enthusiasm should be moderated by prudence.

"I think this is more of a year to be selective," he said. "This is the year that economically sensitive stocks are going to do better."

Edmonds said his buy-list included the quality stocks in such industries as housing, aluminum and automobile manufacturing.

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