Taking Stock

Entrepreneur: The stock market has been on a roll for a long time. Do you think this bull magic will continue?

Larry Wachtel: I think it may slow down. Remember, we've been doing this since November of 1994. In the process, close to $8 trillion of value has been placed in equities in the United States. A so-called "bubble" or "mania" has taken place in terms of equities. At this point, we're at a valuation level that's the most extreme in history. That is, using the S&P 500 Index as your measuring stick, you're selling at approximately 26 times trailing and 23 times projected earnings. Those are the highest valuations in history, at least for the big blue-chip stocks.

It's hard for me to believe that if you annualize this year, which has gone up 16 percent in the first quarter, you come up to 60 percent. Since we're not going to do 60 percent, we have to progress at a slower rate. The Dow has sojourned above 9,000-this has been the fourth occasion [at press time]; it's been smacked back three times. I think this region-the 9,000 area-is going to be the trading range for a while.

Entrepreneur: Do you think there's some hope that the Dow will reach 10,000?

Wachtel: I think that it will occur over time. We are at such an extreme valuation that I would prefer to see the market grind away a little bit and prepare for the future because the higher you go without proper preparation, when the shake-out takes place, it's even more vicious.

Entrepreneur: The crisis in Asia has made the U.S. market fall in the past. Do you expect it to affect our market in the short or long term, or is it completely taken care of now?

Wachtel: When it first took place in 1997, the first order of business was to look at the banking system in several areas, particularly in Hong Kong. If those banks were having difficulty, that would have reverberated around the globe. But a combination of IMF funding and some rational thinking on the part of financial and political leaders has assuaged that particular problem. Then it was a matter of how much their slowdown was going to affect their economies and thereby affect their relationships with the United States. It turns out that about one-third of our foreign trade is done with Asia. On that margin, the crisis might be hurtful to some companies.

Asia needs another year; I don't think it's out of the woods by any means. I think Asia is still floundering, and there are areas, such as Indonesia, that are really in turmoil. So I wouldn't go rushing into Asia.
I think the impact of the Asian economic crisis on the U.S. economy will be felt for several quarters to come. In a perverse way, that will help, because the Asian problem has kept the Federal Reserve Bank from tightening money against a surging domestic economy.

My argument is that if it weren't for Asia, the Federal Reserve would have raised rates last November when our economy showed signs of improving significantly. Recognizing that Asia would affect our domestic economy sooner or later, they refrained. Moreover, if they had raised rates here, that would have weakened currencies in Asia and exacerbated the problems there.

This article was originally published in the September 1998 print edition of Entrepreneur with the headline: Taking Stock.