Tabell’s Market Letter – December 06, 1991
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TABELL-S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC 16091987-2300 December 6, 1991 – —— A-cn.u.aai question regarding the'prospeet for'ilitiesanlie moment seem-s-U,–us tobe7Mis'-ilie SfOckmaiket aheado'r behind. We are prompted to this query by our reading of the daIly press–the entire press, it must be noted, not simply the fmancial page The most widely-used word therem is, it would seem, recession. which phenomenon tends to be cited lD the media as the cause of most of the world's major ills, some of these ills having only a tenuous connection with the economy. Our own reading of the Sunday newspapers last week left us hardly surprised by Monday morning's 30-point fall in the Dow and, indeed, gratified by the subsequent recovery. Like most stock market moves of late, though, tbat one failed to follow through, the averages by and large ending the week a bit lower than where they had started. The press's function, of course, IS to report current events The continued reference to the recession IS, therefore, CUriOllS, SLDce it seems to he the consensus among those who ought to know—professlonal economists–that the recession is over, has been over, as a matter of fact, for some six months. Economists, of course, seldom agree, but the current source of disagreement centers around the nature of the recovery presumably underway. A look at numbers, rather than words, also suggests that the recession has run its course. Real GNP (or GDP, Gross Domestic product, the successor the Department of Commerce is about to foist on us) bottomed In the second quarter. The Department's Index of Coincident Indicators, presumably the most efficient measure of the current state of the economy posted a low in March and remains well above that low despite a modest retreat from mid-summer levels. A casual newspaper reader, however, would have to conclude that the economic contraction is ongoing, Part of the confusion may in fact result from the timing of the reporting of peaks and troughs in the business cycle. We now know, of course, that the recession offiCially began in July, 1990. We were, however, not aware of that fact at the time. The official recogrntIon of the date came much later, in the Spnng of 1991. Likewise the end of the recession has not yet, m November 1991, been offiCIally announced, nor will it be for quite some time–until a recovery is long underway. Which returns us to the original question–Is the stock market ahead of or behind a busmess cycle turning point1 To those familiar with the historical record, there can be little doubt as to the stock market's normal behavior in this regard. It has almost invariably been nahead—tending, in other words, to lead turns in the business cycle. This mstorica1 tendency is so strong that the S & —p5)(thllS beeoofficiallycitedasone oLthe.elevenJeadingindicators.used to.fot !h.!'Sours-L!he-OJlomy.Desplte this ,anellon. ' the bulk of Wall Street verbiage generally winds up trying to forecast the stock market by reference to the economy, when all the data suggests it should be the other way around. There is little in the present picture to suggest that anything other than the normal sort of historical correlation between the busmess cycle in the market. The latter, as we all know, bottomed last October, with a secondary bottom, arguably the true n bottom In January of this year. If the normal sequence can be said to have been followed, it is perfectly logical to suspect that the recession ended 1D the early Spring of this year-March is as plausible as guess as any–and that expansion is now well under way Ag8.J.n, a simple-minded glance at the data confirms all tms. Construction activity, one of the weaker sectors of the economy, has been nsing. Factory orders showed a modest increase for October. Recently announced thud-quarter GDP was up. Unemployment, announced this morning, was flat. True, there are signs of weakness. Jobless claims, for example, continue to rise. Consumer sentiment has deteriorated. since last Spring (here the media's obsessive focus on the recession may be relevant), but remains well above the abysmal levels reached at the end of 1990 Many economic indicators are laggards and indeed the composite of such indicators is shll falling. This, however, is absolutely normal if we are now, in fact, 6-8 months into a recovery. Given all tms, one can examine current stock market valuation levels with a bit more equanimity. There is no need at this point to recite a litany of pIe-ratio and yield statistics. It is a SImple and, it seems to us. incontrovertible fact that the market is at the moment hIStorically high and is not too far away from belDg what can be called dangerously high. This, however, is not a great cause for concern if the market is right –if, m its sharp rise last Spring, it was exhibiting its normal tendency and forecasting a business cycle recovery . What, however, if the market is wrong. First of all, it must be noted that this does not happen very often. There have, however, been reVISions LD consensus estimates in the past, and there wIll be again. The end of the 1990-1991 recession, remember, has not yet been officially announced. Suppose that, just this once, the market is behind the public perception of economic reality as expressed in the news columns. That incorrectness, coupled with high valuation levels could produce–to say the Least—unpleasant consequences for stock prices We may be entering a period, therefore, when careful inspectIOn of economic statistics miy be useful-perhaps almost as useful as Wall Street tends to think it is. What will also be important though is the market's techmcal actton, for it is that action whIch will probably afford us the first clue as to whether the market is presently making one of its rare mistakes. ANTHONY W. TABELL, CMT DELAAELD,HARVEY.TABELL Dow Jones Industnals (1200) 2897.81 Standard & Poors 500 (12.00) 379.60 Cumulative Index (12/5191) 6400.03 In case readers are cunous regardmg the acronym follOWing the SIgnature me above. 11 lS noted thal u stands jar C1U1.rtued Market Techntczan We were lftstrument(ll m the devdopmem althu professfOna cemficanon program and are proud, havmg pasud the requtslU exanunanon, 37 years expenence nOlwuhsrandmg, to have, selves, qualified/or II HallUlg remained In our chosen professIOn for alJ those years, It goes wuhaul saymg that IW regard II as an honorable, scholarly, and dignified one, and we congratulate me Marlut TechmcUlIU AssocUltJon, winch admuusrers the CMT program,for lIS tjJortS mfosunng professIonal recogTUtionfor uchmcal marAzt analysIS No statement or expressIon of opinion or any other matter herem contained IS, or IS to be deemed to be. directly or mdlrectly, an oHer or the soliCitation of an offer to buy or seff any securrty referred to or men\loned The matter IS presented merely for the convenience of the subSCriber While we believe the sources of our information to be rehable, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any action to be taken by the subSCriber should be based on hiS own Investigation and Information Delafield, Harvey, Tabeff Inc, as a corporation and Its officers or employees, may now have, or may later take, pOSitions or trades In respect to any securities mentioned In thiS or any future Issue, and such pOSIlion may be different from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey. Tabeff Inc, which IS registered wllh the SEC as an Investment adVisor, may give adVice 10 Its Investment adVISOry and other cuS10mers Independently of any statements made In thiS or In any other Issue Further Inlormallon on any secunty mentioned herein IS available on request