Tabell’s Market Letter – March 03, 1978

Tabell’s Market Letter – March 03, 1978

Tabell's Market Letter - March 03, 1978
View Text Version (OCR)

1 -, – – – – – – – – – – – – – – – – – , TABELL'S MARKET LETTER ———————— 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW VORk. STOCK EXCHANGe, INC MEMBER AMERICAN STOCK XCHANGE ——————————– March 3, 1978 This letter has made note in the past of the inordinate amount of space devoted in stock – -market c9mmntrlesto. attempts ,t9 Jor1'yastthe econollw …W-eJ!avoe repeAtectly. tae.n issue.with th.e….. ….-t conventional wisdom which states that the stock market's behavior must, somehow, be related to – changes in the statistics on business activity and have attempted to demonstrate that such exercises were, indeed, irrelevant to a stock market forecast. We have, perhaps, for purposes of emphasis, overstated this view, since, we think, the economic outlook does bear a certain limited application to the course of stock prices. We would like, however, once more to devote some space to discussing just how limited that application Is. What prompts all this was Wednesday's announcement that the Commerce Department's Index of Leading Indicators fell by nearly 2 percent in January, which fall was seized upon In some quarters as a convenient explanation of why the stock market took Its latest plunge to new lows. It is perhaps, therefore, worthwhile to walk, step by step, through an analysis of just what this particu- lar data might mean Insofar as decisions for the stock market are concerned. First of all, the leading Indicator composite, as Its name Implies, Is precisely designed to lead, and what it is designed to lead Is the advent of an economic recession. It has relevance, therefore, only to the degree that it forecasts such receSsions. Since we are talking here about re- cessions, one fact must be firmly kept In mind, that Is, that recessions are a phenomenon officially Identified by the National Bureau of Economic Research. It Is worthwhlle, then, to ask at what pOint In time recessions tend to be so identified by the Bureau, and the answer Is that, In the case of the last two at least, they were not officially so identified until after they had taken place. It is, in other words, important to distinguish between past receSSions, which are precisely dated, and future reces- sions which wlll be events, in the early stages, at least, of which we wlll not be aware even while they are happening. I,, .. ,I!n..!Iis .lAght, !US,c!' sa!Ytqk ourselyes111s-'-wh;J thedowntllt;!d1the.-!-ejling .ir!!iC3,\;,'I' – tors -means. The first possible answer-is that it means nothing at all. – 0;;';- factor which has -been noted is that the series, as presently constructed, seems, to have a downward bias in January due, prosaically, to the fact that, in that month, It often snows a lot. Not unexpectedly, this tends to have some effect on bullding activity which constitutes an input to the series. However, even without snowstorms, the index has moved down for fairly protracted periods in the past without that downward movement proving to be the harbinger of a recession. The most recent Instance was April of last year when the series moved lower for three months and did not score a new high untll August. However, there are much more extended Instances on record. In 1966, for example, the Indicator series moved down steadily from March through December and then, finally, by August of the following year, 18 months after the temporary peak, recovered to a new high. Long drops of almost as great a magnitude are fairly common. All this tells us, of course, is that the leading indicators speak in somewhat less than clarion tones. At least a few more months of continually lower numbers will be required before we are able to determine with any degree of certainty whether the index Is, in fact, giving us any signal at all, and, even then, it will not be totally certain that the signal is not, in fact, a false one. Let us, however, for the moment, Ignore these problems and assume that the composite continues to move lower over the next few months to the point where we have SOme certainty that it is, Indeed, trying to tell us something. What, then, will It be telling us Unfortunately, the only thing that we will know for a certainty at that time Is the fact that the Index scored a peak In December, 1977. Since the index Is expressly designed to lead, that fact wlll simply point to the probabllity of a business cycle expanSion peak sometime after December, 1977. overLooking at the past six recessions, we find the lead tllnes.have varied from.fou!,to 3 monthsand thaL -,.- the ave;age lad'time I a bit oneYear. Thlslead;-of course, w1ll have to be carried forward from December, 1977. In summary, then, the significance of the January downturn can be summarized as follows. It is possible, although by no means certain, that, by late this spring, we may have a fairly hard idea that the leading Indicators are saying something about the possibility of an end to business expansion. That end wlll have taken place no earlier than the time of the Signal, say Mayor June, and may, in- deed, be as late as sometime during 1979. This all may be modestly useful Information, but it Is nec- essary to examine its relevance In some detail as far as stock prices are concerned. This we propose to do next week. Dow-Jones Industrials (1200 p.m.) S & P Composite (1200 p.m.) 746.36 87.30 ANTHONY W . TABELL DELAFIELD, HARVEY, TABELL Cumulative Index (3/2/78) 649.15 AWT/jb – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – -No statement or expressIon of OPinIon or ony olher motter herem wnloJned IS, or IS to be deemed to. be, d!TJl!dJy or mdJfedly, on offer or Ihe sollcltotlon of On offer 10 buy Of sell ony security referred to or mentioned The motter IS presented merely for the (onve!'lenc!; of the subscriber Whlle ….e believe the sources of our Informa lion 10 be reliable, we In no way represent or guarontee the otcurocy thereof nor of Ihe statements mude herem Any action to be token by the subSCriber shOuld be based on hiS own Investlgallon and Informallo) Janney Montgamery Seall, Inc, a 0 corparatlon, and Its afflcers or employees, may naw have, or may later toke, poslhon or trades In respect to any Secuntles mentioned In thiS ar any future ISSUe, and such pOSition may be different from ony views now or hereafter expressed In thiS or any other Issue Janney Montgomery Scott, Inc, whICh IS reglslered With Ihe SEC as on Investment adVisor, may give adVice to ,ts Investment ody,sory and other C'Ustomers Independently of any !tolement! made In thiS Or In any other luue. further Information on ony security mentioned herein IS ovollable on request

Download PDF