Wall Street Analysts Suggest Caution

WALL STREET'S soothsayers, often divided in their forecasts, tend to agree on one point for 1990: investors need to be particularly alert to their individual financial situation during the new year because the direction of the United States economy is so uncertain. ``We've had eight consecutive upward years in the stock market,'' says Richard Hoey, managing director and chief economist with Drexel Burnham Lambert. ``That's a pretty good run. But that also makes it a tough year in 1990.''

Mr. Hoey notes that the economy is now showing signs of weakness in such sectors as housing, commercial real estate, and autos. He predicts a mild recession, probably beginning in the second quarter of 1990.

Hoey sees three factors converging together on the downside.

First, declines in corporate profits will lead to cutbacks in capital spending programs, as well as layoffs by some companies.

Second, currently high car inventories will have to be worked off. The auto companies have already announced some plant closings and temporary layoffs during the period ahead.

Finally, consumer demand ``is tentative.'' It is producing a situation not unlike what happened when auto dealers moved a lot of cars off the lots earlier this year with special discounts, but cut into sales (and profits of the auto manufacturers as well as the dealers) later in the year.

Now, if that unhappy scenario strikes you as rather Grinch-like, it should be noted that Drexel Burnham Lambert has been among the more pessimistic of major Wall Street players of late in assessing the course of the economy.

By contrast, The Outlook, the weekly analytical digest of Standard & Poor's Corporation is at the other end of the spectrum - calling for no recession, and a modest rise in the stock market over the next 12 months.

``We see moderate upward growth in the market,'' says Arnold Kaufman, vice president, and editor of The Outlook. The market, as measured by the S&P 500 and the Dow Jones industrial average, should close upward by ``something like 5 percent to 10 percent'' by the end of 1990 over 1989, Mr. Kaufman says.

Despite that generally upbeat forecast, Kaufman believes that there will be ``a fairly sizable market correction'' during 1990, with stock prices falling somewhere in the 7 percent range.

Abby Cohen, the chief strategist for Drexel, notes that a major theme during the months ahead will be ``the avoidance of earnings risk.'' They should also look at ``total return,'' that is, price appreciation plus dividends. She recommends investments in utilities and energy-related stocks, focusing on yield and ``strong operating fundamentals.'' Drexel suggests investors should have a strong cash position to take advantage of future market weakness.

Mr. Kaufman of Standard & Poor's also agrees that selectivity will be critical to investment success during 1990.

The Outlook recommends that a portfolio contain at least 60 percent of its worth in equities. Regarding specific ``superior'' sectors, it sees long-range potential in the undervalued auto sector, despite the industry's current slump. S&P suggests an accumulation of General Motors, Ford, and Chrysler. It also likes Subaru of America.

Major companies in the pollution control sector are also likely to post strong growth during 1990, according to Standard & Poor's. Companies showing promise, it says, include Browning-Ferris, Waste Management, and Zurn Industries. For ``aggressive'' investors, S&P recommends GZA Geoenvironmental.

Other sectors showing promise, according to S&P, include long distance telephone calling (such as MCI Communications and United Telecommunications); Canadian oil and gas stocks (such as North Canadian Oils and Mark Resources). S&P sees growth also in pharmaceutical and tobacco stocks in 1990. Looking ahead to the decade of the 1990s in general, The Outlook forecasts sector strength in communications, retirement and leisure companies, as well as the energy and health care areas.