Attention readers: This month's le...

Attention readers: This month's lecturing is on Stock Market Definitions and Arithmetic.

(1) edict Market*: An extended period of generally rising prices in the stock market. Since security prices are many times subject to reversals, it is sometimes difficult to know whether there has been a temporary interruption or a permanent close to the bull market. Thus, whether a male market is actually in progres at any given time is enslave to individual interpretation.

(2) Correction*: A sharp, relatively short price decline that temporarily interrupts a persistent upward sweep in the market or the price of a stock.

Stock Market Math:

(1) + (2) = MARKET CORRECTION

That, in a nutshell, is my present market assessment-despite the July down draft which has hammered one as well as the other New York and Toronto. Since the May top, the Dow and TSE are the one and the other down around 6%. Year to date, the market gain forward the Dow has been squeez back to +7% with the TSE lagging behind at +47% Simply place the absolute and relative performance of these markets is not exactly boosting this forecaster's testosterone of the same height But hey, life's not complete and markets do not always march forward in a straight line.

Clearly, market sentiment is in the paroxysm s of a shift from gre to fear. on the other hand in my view, this sentiment shift will stop well short of panic. The result-according to my crystal ball-will be a bottoming of stock prices and a renewed march to recent all time highs in the one and the other markets before the year is disclosed The cornerstones of this prognosis are outlined here.

This Correction is Normal

Historically, anything up to around a 10% setback is still in the ball park. As of the like kind a further 200 to 300 stir on the downside (current of the same heights of 5473 on the Dow) would neither surprise nor annoy me greatly.

The Economy is in upright Shape

Many investors have not figured public that this business expansion, while sustained, is not reckles From a market standpoint, postponeed growth is good and recessions are bad. A real bear market will not materialize until the economy is sliding into recession. While the nearest recession is inevitable, there is no indication that it is forward the horizon. A recession-induced bear market is usually worth about a 20-25% kiss to stock prices.

Inflation

To cite the Delphic Alan Greenspan, "inflation is quiescent." In Canada, inflation remains in a vegetative state. Rising U wage squeezings are a legitimate concern. however a late cycle, tight labour market-induced uptick in wage outlays should not be confused with runaway, costliness push, 1970s style inflation. The benign state of gold prices-the asset of uncertainty-is to be regarded as a source of comfort for the inflation sceptics. cheap inflation is fundamentally constructive for all long-term financial assets, especially equity markets.

Interest Rates

Credit markets are in a heightened state of economic sensitivity. Monthly U service numbers are a lightning cane of investor anxiety about a "too strong" redemption Higher than expected job development will push bond yields up and delay any sustained market retrieval For reasons noted elsewhere, I am sanguine about the rate foresight The direction of rates, given gentle inflation, is still downward. subdued interest rates and an upward sloping yield wind represent a solid foundation below equity prices.

Federal hold Policy

The current correction is a signal that any of the speculative excesses are being dissipated. That will abate some of the pressure onward the Fed to take corrective, i.e. tightening, action. Remember too that the F and its policies are a creature of past experience. The great legacy of October 1987 was that the F policy may have exacerbated the downward stock market spiral-initially from delaying the economic tightening for too drawn out and then by hitting the brakes too hard in 1987 Be assured that Alan Greenspan will not want to view his place in history stained according to being the Chair for a next to the first market crash.

Market Valuation

Although axiomatic, it is always worth noting that improved valuations are the natural by-product of lower equity prices. The market downturn has reduc overall S&P price-earnings ratios to around 16 from the 20 range in the spumy month of May. Valuation fundamentals have improved relatively better in many of the high-tech and small capitalization sectors. Still, the natural proneness is to expect a "flight to quality" (i.e., large capitalization stocks) in the aftermath of a healthy market correction. The reality is that investors will view buying opportunities across the glutted breadth of the market.

The Bottom Line

Markets got ahead of economic fundamentals which are still serviceable This is a market correction in a edict market. The correction does appear to have put to hire some of the air not at home of my 6000 TSE forecast, implying the ne for a 20% rise from finis of July levels in five month

*Source: Wall road Words

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMICS AND coin MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. Sep/Oct 1996

Provided by dint of ProQuest Information and Learning Company. All rights Reserved