Banker Suggests Recovery Half Over

DAVID McHUGH says the economic recovery in the United States, based on the history of past recoveries since World War II, may be already close to half over.

Considering that many of us only found out recently that we are no longer in a recession, that is not cheering news.

Yet Mr. McHugh certainly does not sound like a wild-eyed economic theorist. Soft-spoken and collegiate looking, he is a vice president and senior investment officer with Northern Investment Counselors, a division of Northern Trust Company, Chicago. Northern Trust has an estimated $500 billion in its various accounts, and McHugh's investment operation directly manages about $4.5 billion of that.

Northern Investment Counselors looks for quality growth stocks for wealthy individuals. (His minimum investment: $2 million.) McHugh says that quality growth issues are particularly important during slow United States economic growth.

McHugh's argument about the recovery is that the average period of expansion in the US runs about 44 months. Yet the last recession, so we have been told by the National Bureau of Economic Research (which officially pinpoints the turns in the business cycle), ended in March 1991. That means we are in the 22nd month of recovery, or close to the end of the second year of the expansion. McHugh says that despite economic indicators suggesting continued recovery, he is "wary" of the stock and bond markets.

Northern Trust economists see US real gross domestic product growing around 3 percent in 1993 and 1994; McHugh personally is concerned about a possible market correction late next year "that could run more than 10 percent."

McHugh likes certain capital-goods stocks, the financial area (although not big money-center banks), and some technology stocks. His investment division invests in a list of 40 stocks, after screening up to 7,000 companies.

McHugh's concern about being at midpoint in the expansion is not a majority view. "I see absolutely no evidence to suggest that the economy is playing itself out right now," says Anna Schwartz, a research associate with the National Bureau of Economic Research.

Ms. Schwartz says that the economy would grow faster if the Federal Reserve Board were meeting an important money-supply target, rather than just focusing on interest rates.

Where McHugh's argument is "mainstream" is his assessment of slow and steady economic growth for the foreseeable future. That slow growth means equities will not turn in double-digit returns.

Salomon Brothers, for example, concludes that "1993 will be a difficult year for investors." Salomon sees the Standard & Poor's 500 index locked in a narrow trading range of 400 to 450 points this year, close to the current range of 430 points. Total returns from stocks this year will run around 6.5 percent, Salomon estimates.

The upshot, Salomon argues in a new report, is that 1993 will be a "stock pickers" market, with the focus on individual issues rather than market sectors.

Gene Jay Seagle, who heads up technical research for Gruntal & Co., an investment house, agrees. But Mr. Seagle, who was one of the most accurate forecasters last year in predicting the final outcome of US equities markets, does not believe the market is heading for retrenchment based on a new economic downturn.

The high liquidity in the market (with lots of cash available for investing), low inflation, low interest rates, and fair returns should boost equities this year, he says. Seagle also says that overseas money will be flowing into US equities in future months, mainly because stock returns abroad are currently underperforming US returns, given slow growth and political instability in many nations in Europe and Asia.