Favorable interest rates ahead for NYC real estate

Real Estate Weekly, Jan 22, 1997 by David X. Stumpf

Favorable interest rates have been partly responsible for the smooth continual growth cycle which the economy has been able to sustain. Strong corporate earnings were also largely responsible for driving stock prices higher. The bull market has now lasted 15 years and still there is no apparent end in sight. Is there a substantial correction of perhaps around 10 percent or more in store for the stock market this year? Many analysts are now becoming nervous that the bubble may soon be about to burst. Will amateur mutual fund investors have the stomach to absorb a 10 percent correction in stock prices without loosing their heads and withdrawing substantial cash from the mutual funds which have poured capital into Corporate America?

Common household investors now have up to about a quarter of their financial assets in stocks and mutual funds. That is the highest it has been in 23 years.

Storm Clouds on the Horizon

Hopefully, everyone was paying close attention in early December, when Federal Reserve Chairman Alan Greenspan wondered aloud whether "irrational exuberance has unduly escalated asset values" in regard to stock prices. Wall Street responded with an immediate drop in the Dow of over 139 points in the ensuing week of trading. Historically, Federal Reserve Chairmen have always been careful not to comment upon the stock market, since any speculation on their behalf might send mixed messages down to the street and cause the market to go into a tailspin.

In fact, such comments from the Fed Chairman are so rare, one must wonder if he was trying to spike the punch bowl in order to bring about a mild correction. Did Mr. Greenspan hope to create a little economic slowdown without having to raise short-term interest rates? It seems as if he was pondering aloud whether US investors have learned their lesson from the recent skid in the Japanese stock market, due to the inflated asset values. Mr. Greenspan went as far as to invoke the infamous "burst bubble" analogy, which must have struck fear in even the most bullish of traders. Was he hinting that he may raise interest rates if investors do not cool their heals any time soon?

If he is right and something more than a mere correction is in store, then it may take several years before the market is able to rebound. Remember, it took the Dow 10 years to recover lost ground from a 45 percent drop back in 1973 and 26 years to recover from the Great Crash of 1929.

However, the recent decline in the Dow caused by Mr. Greenspan's comments was actually short-lived. Mutual fund managers greeted the drop in prices as another buying opportunity and quickly snatched up some bargains. The year-end surge in the stock market (300 points over eight trading sessions) was caused by news once again of growing signs that the economy has cooled off over the last five months. Analysts cautioned that the gains in stock prices occurred on low volume trading days, caused by the holiday schedule at the close of the year. In addition, there was also some profit-taking, which caused the market to fluctuate. Durable goods orders dropped 1.6 percent in the last quarter, and this has renewed hopes that growth may be contained at 2.5 percent this year.

This latest good news regarding slow economic growth had allowed the market to set it's 44th new record of the year, just three weeks after Mr. Greenspan spooked investors and traders alike with his now unforgettable "irrational exuberance" comments. Earlier in the year, the Dow climbed 500 points over a six-week period, spurred by a post-Presidential election rally. Wall Street seems to be satisfied with the reelection of President Clinton, and they have interpreted the results as a vote for more of the same in regard to the overall economy. It's "steady as she goes."

Bond Market is Mixed

A drop in the stock market might not be such bad news for the bond market. A recession would likely cause the Feds to lower short-term interest rates in order to spur the economy and stimulate renewed growth. Indeed, ghoulish bond traders would welcome a recession, which would in turn mean lower interest rates and act as a inflation deterrent.

This economy does not seem to obey the usual laws of economics. The market was able to rebound from a 167 point drop back on July 16th because it seems that any recent drop in stock prices has been seen as a buying opportunity, rather than an indication that it might be time to abandon the market for greener pastures in the bond market. There is now growing concern over the Japanese economy and their banks, which may be poised for a catastrophic credit problem. The dollar was at a 45-month high against the Yen at the close of the year. The strong rebound of the dollar (which was also at a two-year high against the German Mark in early December) has benefitted vacationers - but, it may also end up hurting US exports, which have become more expensive overseas. There has recently been a steep rise in the US trade deficit.

The Federal Reserve has not touched short-term interest rates since they lowered them a quarter percentage point last January. Both the Federal Economic Condition Summary (the Fed's Beige Book) and Housing Starts data are due out on January 22nd. Brace yourself for the possibility o f renewed activity by the Fed's if the data proves to warrant fears of inflation. Mr. Greenspan has continually stressed the importance of keeping inflation under control. The next Federal Open Market Committee (FOMC) meeting, where the Feds usually change short-term interest rates, is set to meet on February 4th and 5th.