Bearish Soviet 'news' routs investors
The "Nervous Nellies" seem to be running the stock market lately. After absorbing a big drop the first day, and with bad news landing around it all last week, the market almost stood still, not knowinw which way to turn. Then, at week's end, when one more piece of bad news came -- even though it later appeared false -- investors retreated for cover.
All it took to unto three days of "hanging tough" was the report of a vast oil discovery in the Soviet Union, a find that cound contain seven times the world's previously estimated oil reserves, according to the Swedish research firm that released the report. This sent petroleum, oil exploration, and drilling equipment stocks sinking, even though Wall Street and CIA analysts later discounted the claim. Some US oil experts said the Swedes might have misplaced a decimal point in making their estimates. And later in the day, even the Soviet Union said the findings were false.
The disclaimers didn't help. On Friday, the Dow Jones industrial average dropped more than 14 points, closing at 956.23, down 37.11 for the week.
Before the report on Soviet oil, investors seemed to be waiting for some sign of direction.
"The market is vamping," said Larry Wachtel, an analyst with Bache Halsey Stuart Shields Inc. "It's like a dancer saying, 'Keep the beat going until I figure out what to do.'"
Until Friday, he added, "the market had been able to hang tough against a sea of bad news, including three international trouble spots." These were the continuing war between Iraq and Iran, renewed tensions on the Jordanian-Syrian broder, and concern that labor unrest in Poland might be ended by Soviet troops.
The market also withstood another increase in the prime interest rate that left it at 19 percent, following the Federal Reserve Board's one-point increase, to 13 percent, on the rate it charges for loans to member banks.
One reason investors were able to hold on until Friday, Mr. Wachtel said, was that they were still anticipating an improved climate for business under the coming Reagan administration. This "euphoria," he added, explained the Dow's ability to fight its way above the mythical 1,000 barrier a couple of weeks ago, and its ability to stay above 950 since then.
"Whenever the Dow reaches 1,000, it immediately gets slapped back," he said. But he believes that the next time the 1,000 line is crossed, it will stay there for a while. He does not think that day is far off.
The "Reagan rally" may have been doused as investors discovered that all the expectations raised in the campaign may not come to pass, said Monte Gordon, director of research at the Dreyfus Corporation. "That euphoria wore down as they [investors] figured out three things about what Reagan said he would do." These, Mr. Gordon noted, are: that Mr. Reagan may not be able to do all he promised; that he may modify some of the proposals; and that it will take time for any changes to take effect.
While investors seemed uncertain what to do in the stock market, others were more sure about what to do with long-term bonds -- buy them. If interest rates are at or near their peak, as most analysts believe, the end of the year could see the start of a rally in bonds.
"The bond market has been under terrific pressure as we have been going through these interest-rate increases," said Arnold X. Moskowitz, first vice-president and economist at Dean Witter Reynolds Inc. "We will see the prime hit 20 percent soon." These high rates have been taking their toll on consumer spending for autos and housing, he explained, prolonging the "peekaboo" recession well into 1981.
As a result, he continued, bond prices could increase 15 to 20 percent in the first half of 1981.
The key to this forecast, he added, is a drop in commodity futures prices, considered a barometer of inflationary expectations. After hitting a peak of 337.6 on Nov. 20, the Commodity Research Bureau's futures price index, a measure of trends in 27 commodities, has dropped more than 4 percent. When this index drops 10 percent, Mr. Moskowitz says, investors can take this as an indication of a break in inflation and "buy bonds aggressively."
