Tabell’s Market Letter – November 14, 1969

Tabell’s Market Letter – November 14, 1969

Tabell's Market Letter - November 14, 1969
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Walston &- Co. —–lnc —-Members New York Stock Exchange and Other Principal Stock and Commodity Exchanges OVER 100 OFFICES COAST TO COAST AND OVERSEAS lABELL'S MARKET LETTER November 14, 1969 Any reader of the financial page is certainly familiar with the great debate that, at the moment, is raging in economic circles. On one side are those who contend that the monetary restraints imposed on the economy throughout 1969 are indeed working, even though the results may not yet be apparent, and that the major danger at the moment is one of overkill — the precipitation of too deep an economic recession in 1970. The other side would argue that inflation has not yet been cooled — that the economy is still buoyant and continued restraint is..Btill-I'.equired. so obviously turn and start to move up last August There is an answer, we think, and it is perfectly consistent in light of the market's past behavior in similar circumstances. . '.1 Let us state, first of all, that we find ourselves on the first side of the argument mentioned above. We think that the effects of monetary restraints will become manifest at the end of 1969 and early 1970, that a recession is a distinct possibility, and that there should, under any rational policy, be shortly forthcoming some measure of monetary ease. How, then, do we square this view with our admittedly optimistic assessment of the outlook for common stock prices The National Bureau of Economic Research defines four periods in post-war econo- mic history as recessions November 1948-0ctober 1949, July 1953-August 1954, July 1957 April 1958 and May 1960-February 1961. In the case of four, there was an accompanying decline in stock prices. In the 1948-49 rec Sl in stocks came five months before the economic recession as defin9,yt e . 1953-54, it came six months before and in 1957-58 a month before (a h s c lces had been flat for a year), and in 1960-61 the peak in stock ain the nomy by five months. Again, in all four cases, the market had bottomed rted rior to the recession trough. The marketbottom-led the b ou onths-in-1949,eleven-months-in 1954;- six months in 1958 and five Now, admittedly, 'f we rm period, it is difficult to know where the peak will e e 1 P n ted. The FRB Index has moved ahead, albeit sluggishly, throu . Corporate profits, however,peaked in the first quarter and earning n e Clard & Poor's 500 reached their high in the last quarter of 1968. All this, it seem us, is perfectly consistent with a market which reached its high in Decerhber 19 , and it s bottom at the end of .Tuly 1969. The stock market's quite obvious lead on the economy is an outgrowth of its willing- ness to capitalize earnings which are being affected by a recession more generously than it capitalizes earnings at the height of a business boom — which is, when one thinks of it, a perfectly rational tendency. In the four recessions mentioned above, corporate profits after taxes, as measured by the Department of Commerce, declined around 25 in the first three and 11 in the last. In the first two recessions, the decline in earnings on the Standard & Poor's 500 was less than the total corporate profits decline, and in the latter two it was slightly greater. What is interesting, however, is the fact that in every recession the price earnings ratio has increased sharply, 20 in 1948-49, 15 in 1963-64, 33 in 1957-58, and 44 in 1.960-61. — – This is especially interesting in view of the current relatively low multiple on the Dow. Present prices mark the Dow at 14 times latest earnings. In a recession a 20 decline in earnings, about the worst being forecast, would bring earnings of 48. A 30 increase in the multiple, not at all out of line historically, would result in those earnings being capitalized 18.2 times for a price of 873. Were the increase in multiple to be compara,ble to the 1961 receSSlOn, the multiple could rise to over 20, which would result in a price target of close to 1000 at the recession's bottom. Dow-Jones Ind. 849.26 Dow-Jones Rails 196.22 ANTHONY W. TABELL WALSTON & CO. INC. AWTamb ThIS market letter IS publtshed (or your COn\CnlCnec nnd mformatlOn lind 1 not tn offf'r to sell or .1. soiL'Jtntton to bu\ !lny seeuntles The In- ormatIon WAS obtnmed from sources we heILevl.' to he rehable. hut …. e do not guarantee Its accunl.l'\' emplo),s may have an mter('f!t In or purchase and sell the S(eurltll's rercrrl(1 to herein & Co Inc Ami Its officers. director'! or WNSOI

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