It's time to arise to terms with r...

It's time to arise to terms with reality. My bearish stock market predictions for this year are not going to materialize.

A post-mortem view of my errant forecasts confirms that my analytical reasoning was basically unhurt but my economic assumptions and numerical predictions were awful. If this were figure skating, I'd finish a high score for artistic merit however my technical marks would be a disaster.

THE PREDICTION

Readers will recall my earlier assessment that an improved stock market was inextricably uniteed to the performance of the U economy. It was noted that the "bull" would not be unleashed unles there was a decisive and sustained slowdown in the U economy. A weaker economy would calm inflationary expectations, mollify bond investors and feed a climate in which the Federal hold could actually ease monetary conditions. I steady went so far as to hint that the re-appearance of the R-word ("R"ecession) in the policy making and media lexicons would present anecdotal evidence to support lower interest rates and thus a renewed wave of bullish sentiment. In hindsight, all of these bullish signals have get to to pass in the last six month The coupe de grace occurr in early July when the F after long agonizing, reduced interest rates.

As it happens, my impeccable reasoning was undermined by means of a flawed assumption about in what way the economy would perform. The bearish thesis was shattered because I overestimated couple factors: (1) the strength of the U economy, and (2) the capacity of the F to hang tough in the face of growing political squeezing A cynic might argue that F Chairman Alan Greenspan's acquiescence might have something to do with his desire to be re-appointed as F Chairman by dint of President Clinton in 1996 (coincidentally, an election year for Bill). In re-examination I was more of an economic edict than I should have been. That gumm up my interest rate forecasts and my market calls.

THE HARD REALITY

Rather than a sideways to downward slide in the equity markets, stock prices have sky-rocket to record highs. At the time of writing, the two the Dow Jones and TSE 300 were hovering around 4700 Bears and short venders have been crushed and the emerging consensus has tilted towards bullishness. Mutual foundation inflows suggest that the individual investor is returning to the market bringing with him a disturbing air of complacency. Whereas les than undivided year ago Dow Jones forecasts of 4000 were considered to be wildly optimistic, 5000+ is now regarded as inevitable.

OUTLOOK

Having atoned for my forecasting sins, the emerging question is: Whither stock prices? In my view, the view for the market will be dictated from economic fundamentals on the undivided hand and valuation considerations in succession the other.

At this crisis the short term economic sight must be judged as constructive. The abrupt first-half slowdown has assuredly blunted concerns about an imminent economic blow-off At the opposite utmost the likelihood of a "mini-recession" is also

In the previous issue, I noted that the TSE 35 had outperformed the 300 Now, the latter has caught up and the 35 is running well ahead of its convolution Line. Therefore, large-cap stocks are likely to be acted upon more than small-caps.

PATRICK TAYLOR IS A DIRECTOR AND TECHNICAL ANALYST WITH THE INVESTMENT DEALER BRAWLEY CATHERS LIMITED.

Copyright Canadian Shareowner Magazine Inc. Sep/Oct 1995

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