Wall Street Awaits Progress in the Gulf

AS 1990 prepares to give way to a new year, it's waiting and watching time on Wall Street. The investment community would like nothing better than a breakout of peace in the Gulf and clear signals that this will be a relatively mild recession. Historically, small stocks post a rally beginning in mid-to-late December, outpacing in price the stocks of big companies. This happens after the price of small-company shares has been pushed to attractive lower levels by selling for tax purposes. The small-stock rally tends to roll into January, and sometimes with enough intensity to nudge along the broader market.

Whether that pattern occurs this holiday season is problematic, given uncertainties about the economy and the Gulf situation. The two closely-interlinked issues ``will have to be redressed for the stock market to begin an important new ascent,'' says Larry Wachtel, an analyst with Prudential Bache Securities, Inc. ``If there's no resolution of the Gulf crisis by the early half of January that will be the most important factor influencing the immediate course of the market.''

Based in part on hopes for a peaceful Gulf settlement, the market, as measured by the Dow Jones industrial average, posted a modest gain in the middle of last week. As of this writing, the Dow is in the low-2600 range. (The all-time high for the Dow was 2,999.75 points, registered July 17.) Wachtel believes that the market is currently best described as on an ``even-keel, with nothing really dramatic occurring.''

``Almost everyone now agrees that we're in a recession.'' But the depth and length of the recession remain unclear, Wachtel notes. The way in which the investment community perceives the recession will help determine the direction of the market and which sectors post gains, says Wachtel.

``If the recession is considered relatively short, and will end in Spring, then many investors would see this as a good time to buy stocks. Such stocks would include cyclical issues, such as autos and chemicals ... if the recession is perceived as deep, and lasting well into 1991, then many investors will buy defensive stocks,'' such as food issues, or grocery chains.

``I think the market's poised for further gains,'' says Laszlo Birinyi of Laszlo Birinyi Associates, a consulting firm. ``The market has climbed 10 percent from its October lows. That's a nice rally. The market is catching its breath now, which isn't inappropriate. A lot of investors missed this rally. Obviously, some new developments, such as a further lowering of interest rates, or good news out of the Gulf, would help. But the mistake would be to look for a specific catalyst.''

Economists differ among themselves about the extent of the recession. The middle-ground is probably represented by DRI-McGraw Hill, which is anticipating a ``typical'' post-war recession about 11 months in length, and thus, bottoming out in late Spring, with the economy beginning its upward climb about July.

Still, this particular recession is unique in at least one extent, says David Wyss, an economist with DRI-McGraw Hill. ``This is much more of a consumer-related recession than has been the case among postwar recessions.'' Mr. Wyss believes that this recession may turn out to be the second-worst postwar recession in terms of a drop in consumer spending. Wyss estimates that consumer spending could drop around 1 percent, or between $30 billion and $35 billion. The current drop in spending is heavily linked to ``fear,'' says Wyss, including concerns about the Gulf.

For the moment, Wyss says, consumer spending in some areas looks good - clothing, for example. But Wyss expects spending on consumer durables such as autos, furniture, and big ticket appliances to be down. Spending on toys also is off.

Assuming that DRI-McGraw Hill is on target, it is quickly apparent why the investment community want a resolution of the Middle East crisis and thereby a lifting of one of the concerns dampening consumer spending. -30-{et