ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, November 27, 1996 TAG: 9611270027
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
WILL DEFINITELY COME DOWN. Remember, First Union's chief economist said, it always does.
If the stock market could keep up its post-election pace for a full year, it's gain in terms of a major index would be a startling 283 percent, said David Orr, chief economist for First Union Corp.
His calculation is based on the Standard & Poor's index of 500 stocks, which is up 8.4 percent since election day.
The annual gain won't happen, Orr said, although nobody can say exactly when a break in Wall Street's steady climb will come. The traditional wisdom, he said, is that the market "will go up until it goes down."
The S&P index is up 26 1/2 percent in the past year, he said, the seventh spike since 1960. "It never stays there for very long," Orr said. "Historically, I would say this is a very rare era."
But it has been grounded in reality. Orr said the index is up 96 percent since the end of 1991, a period in which earnings of those same 500 companies rose 85 percent.
Until the last few weeks, he pointed out, stock prices reasonably reflected the good profits of American companies.
But through three quarters of this year, profits are up only 6 percent and Orr believes next year's increase will be only 2 percent to 3 percent.
Based on recent company earnings and the yield of 10-year bonds, Orr said, the market is 13 percent too high. That kind of correction would result in an 800-point drop in the widely watched Dow Jones average of 30 industrial stocks.
He said he's not forecasting that will happen next week. Right now, he explained, the market is "in the manic stage. It's going up because it's going up."
Orr, who works at the Charlotte, N.C. company's headquarters and was in Roanoke Tuesday to discuss the economy for the board of First Union National Bank of Virginia, said the market is partially driven by investors from Asia and Europe.
The short-term interest rate in Japan - the rate Japanese would get on a bank CD - is one-half of 1 percent, Orr said, while the German rate is 3 percent.
And the economies of those countries are not growing. The German gross domestic product is 1 percent, but Japan's is zero.
Until those overseas economies get back on track, Orr said, their citizens will be pouring their money into the American stock market.
Another reason for the market boost, he said, is that investors no longer fear an imminent increase in interest rates. Higher interest means more competition for stocks.
Orr said he believes that the Federal Reserve Board will actually lower rates in the spring, although he admits this is the minority opinion.
That's because he expects the economy to slow at the end of this year and the beginning of 1997.
Next year, Orr said, retailing will be hit hard by the cutback in credit card lending. He said the present delinquency rate of 4 percent is as high as the banks are willing to go, so they are no longer pushing cards or increasing credit limits. The rest of the economy will perform well next year, particularly computers, technology and office equipment.
Virginia has been lagging the rest of the country in growth because of the shrinking of the federal government and defense industries, Orr said. Southwest Virginia has not been hit by these layoffs, he said, but its job growth is almost static at about 1 percent.
LENGTH: Medium: 68 linesby CNB