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Yardeni on Stocks: A Bearish View

Batten down the hatches. If Deutsche Bank Securities Chief Economist Ed Yardeni is right, the turmoil we've seen in the stock market during the second half of 1999 is only a precursor to bigger declines to come. Yardeni predicts that by March 2000 the Dow Jones Industrial Average could fall 30% from its all-time high of 11,326 set on August 25, a tumble that would drive the blue-chip indicator down to about 8,000. Yields on 30-year Treasury bonds in this recessionary scenario could drop from the current 6.25% or so to less than 5% and perhaps close to 4%, he says.

Yardeni's concern is that the stock market has been priced "for perpetual perfection," a happy outlook that's just not realistic. Worse, he says, the impending Y2K computer crisis could wreak havoc on the world's economy, sharply disrupting business profits.

Yes, conventional wisdom holds that the threat from the widely publicized Y2K bug, which can prevent older computers from reading year 2000 dates correctly, is vastly overrated. Most companies say they have done or will do the necessary work to correct the problem before the bug can wreak havoc with their computer systems. But Yardeni is skeptical.

"Let's look at these assurances," Yardeni told his audience during an October 13 luncheon address to the SVIA 1999 National Forum in Washington, D.C. "Almost all of them are based on self-reporting. As economists and investors, we need data. Imagine going to a company's 10-Q filing with the SEC, and, instead of providing an earnings report, the company just said, 'We did better. Trust us.' Never before (Y2K) have we as humans so trusted others we are depending upon."

In a poll of businesses that he conducted in June, Yardeni added, only 16% of the respondents said they would need this year's fourth-quarter to complete their Y2K remedial work. But when he conducted the same poll in September, 43% of the respondents said they would need the fourth quarter to complete their work, suggesting that schedules were slipping dangerously. Also, 20% said they were still waiting for mission-critical, Y2K-compliant programs from third -party software vendors.

How would Y2K failures impact the economy? In part by disrupting the global supply chain and sabotaging corporate productivity. While many U.S. companies have been working on the Y2K problem for years, Yardeni says, efforts in some other countries have lagged far behind. For example, he says, Venezuela, Mexico and Italy didn't start addressing Y2K until this year.

Among the companies that would be hit hardest by a disruption in the global supply chain would be those that depend on just-in-time manufacturing techniques, including the influential auto manufacturing sector.

Despite this gloomy short-term scenario, Yardeni was quick to remind his listeners that he is actually optimistic about the stock market for the long term.

"My prediction is 15,000 for the Dow by the year 2005," Yardeni said. "That might not sound like much with the Dow where it is now, at about 10,500, but it sounds very good compared to Dow 8,000.

"I'm wildly bullish about the long-term," Yardeni concluded. "I just think there are going to be some buying opportunities along the way."

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