MERRILL LYNCH PREDICTS SLOW ECONOMIC GROWTH IN 1992
WITH AN ELECTION YEAR TAX CUT LIKELY
NEW YORK, Nov. 25 /PRNewswire/ -- The U.S. economy should grow, although slowly, in 1992, and an election year tax cut seems likely, according to forecasts issued today by Merrill Lynch (NYSE: MER) research professionals at the company's Annual Economic and Investment Outlook Press Conference.
Merrill Lynch also predicted the stock market could end 1992 with a net gain, after declining 15 percent or more early in the first half of the year.
Inflation is expected to remain in the vicinity of 4 percent, while the economy is expected to grow slowly in the beginning of the year and then pick up.
The dollar is expected to recover by mid 1992 against the German mark but weaken against the Japanese yen. Meanwhile, short-term interest rates should decline further.
"Distinctly sub-par growth can be expected during 1992," said Donald H. Straszheim, the firm's chief economist. "The economic risks are not so much recession again -- the dreaded 'double-dip' -- but rather recession still. The U.S. economy is barely staggering forward. Most of the momentum generated during the spring and summer of this year has been dissipated. The economy should do better as 1992 unfolds, gradually benefiting from lower interest rates."
The economist also predicted that, "since the state of the economy is often important in election years, a tax-cut seems likely to be enacted in 1992."
Straszheim expects another easing of monetary policy by the Federal Reserve by the end of the year and says that the Fed funds rate, now at 4.75 percent, is likely to be reduced to 4.50 percent.
"Indeed, if the economy remains on its current course, further easing cannot be ruled out, and the discount rate may yet be cut to 4 percent," he said. "However, the 30-year Treasury long bond yield is expected to remain in a rather narrow 7.75 percent to 8.25 percent trading range."
Straszheim also noted that corporate earnings are past their low point on a year-to-year basis, with considerable improvement coming, even with a lukewarm economy. "Recent corporate cost-cutting will pay handsome benefits," he added.
Robert J. Farrell, Merrill Lynch chief market analyst, said, "We expect stock purchases by individuals to continue to increase in 1992 and beyond, primarily due to the sharp decline in money market returns.
"The stock market, however, is a complex mechanism and has to deal with many other influences in the year ahead," Farrell continued. "The first is that 1991 has been such a great year for stocks that valuations are already historically high, with earnings in 1992 still in doubt; sentiment is very bullish compared to a year ago when stocks were down and depressed; and there has been a record $40 billion in new equity offerings.
"It seems from this that there is risk of a letdown or cooling off in the stock market in the first several months of 1992, with a possible decline of 15 percent or more," he noted. "However, in an election year, markets tend to end with a net gain, and it seems that 1992 should follow this historical probability."
As for areas of opportunity, Farrell focuses on three equity investment themes for the 1990s. These three are: companies with strong growth or earnings; small and medium capitalization stocks; and the capital goods sector, including basic industrial and technology companies. He said they should become increasingly more profitable as they benefit from cost cutting, increased efficiency, the lower dollar and demand for worldwide infrastructure rebuilding.
Charles I. Clough, Merrill Lynch chief investment strategist, said: "The most basic force in the financial markets will be the migration from money market securities held by the household sector into longer term financial assets.
"The recent weakness in equities may temporarily slow that process, but it is unlikely to reverse it," Clough added.
"The downsizing of the banking system will continue to affect financial markets well into the 1990s," he said. "As banks consolidate to relate more efficiently to an economy which is determined to borrow less, they will be forced to liquidate deposits. This suggests that low money market rates may be a fact of investment life for sometime. Investors will be forced to build maturity into their portfolios."
Looking ahead to 1992, Clough is maintaining his benchmark asset allocation mix of 60 percent stocks, 35 percent bonds and 5 percent cash. He said more favorable valuation and more substantive signs of recovery would suggest an additional move from bonds to stocks, with greater emphasis on cyclicals.
"Cyclical exposure in stocks should be focused on those economic sectors where industry restructuring is underway," he added. "We would use pullbacks to build positions in the technology, transportation and capital goods sectors. Selected investment management companies will also benefit from the future we see."
Martin J. Mauro, Merrill Lynch senior economist, in analyzing and forecasting the fixed income markets, said: "The yield curve is unusually steep and may well steepen further in the first part of 1992. Potential easing by the Fed could lower short-term interest rates, while longer term rates are likely to be propped up by a large amount of Treasury borrowing and reduced purchases from abroad."
Mauro noted that the challenge for investors "is to strike a balance between the extra yield that comes from extending maturity and the price risk that longer maturities entail.
"The optimal risk/reward combination varies in different markets," he added. "In the Treasury market, for example, we recommend intermediate issues such as the seven-year Treasuries, while in Municipals, we like essential-service revenue bonds in the 15-year maturity range.
"Municipal supply may be heavy early in 1992, especially in general obligation issues," Mauro said. "A supply-induced yield back-up in that sector may be a buying opportunity."
The fixed income economist also recommends an overweight position in mortgages, including GNMAs with 9-to-9.5 percent coupons and the Planned Amortization class of CMOs.
In discussing the international outlook, William P. Sterling, manager, international economics, said: "we expect industrial nations to post sluggish growth of around 2 percent, after growing only about 1.2 percent in 1991.
"Germany and Japan should experience growth recession," said Sterling, "while Canada, the United Kingdom and the United States will have sub-par economic recoveries."
According to the international economist, Latin America will be one of the fastest growing regions in the world in 1992, with a 5 percent growth rate. "The region is benefiting from resumption of capital flows, based on successful market-based reforms and debt-reduction programs," he said.
In contrast, Sterling predicted growth in the Asia-Pacific region of only 3.5 percent, which is considered extremely sluggish by that region's standards. He said that an expected slowdown in Japan will offset robust growth of 7 percent in other Asian nations.
"Inflation should be relatively subdued in the industrial nations in line with sluggish economic activity," he noted. "Among the major nations, Germany alone is expected to see higher inflation in 1992, due to wage and tax pressures associated with unification."
/CONTACT: Fred Yager of Merrill Lynch, 212-449-7355/
(MER) CO: Merrill Lynch & Co. Inc. ST: New York IN: FIN SU: ECO FC-OS -- NY043 -- 6865 11/25/91 12:50 EST