View from City Road: Man with a warning for Wall St

WALL STREET entered 1993 in its most optimistic frame of mind for years. For professional rune-watchers like Bob Farrell, of Merrill Lynch, especially in President Bill Clinton's inaugural week, this sounds a cautionary note.

Mr Farrell, 60, senior investment adviser at the US securities house, was on an annual visit yesterday to give London institutional investors the benefit of his meditations on American stock markets, which have a characteristically historical sweep.

To save others the trouble, he has worked out that since 1932 the first year of a new president's term has been most negative when the last two years of the preceding term have been the most positive.

Whatever technical measures you look at - the ratio of puts to calls, limit to market buy orders or individual investor sentiment - the evidence of bullishness, if not complacency, is evident.

This time a year ago Mr Farrell took the view that Wall Street was riding for a fall. In the event the market did little overall as the broadly-based Standard & Poor's index showed a gain of 5 per cent.

Not surprisingly, he thinks the US market is now even more overvalued, taking as his yardstick the dividend yield on the S&P, which at 2.9 per cent in the last quarter of 1992 was at its lowest level since the bull market peak of 1972.

But the turn in the US economy has modified Mr Farrell's view on the 28-months-old Wall Street bull market, which he now believes to be intact if a little vulnerable.

Despite the well-reported rush by individuals out of money market-related funds into mutual funds, stocks held by households as a proportion of total financial assets at 18 per cent are below the 20.4 per cent 25-year norm and a long way below the 36 per cent peak in the last quarter of 1968.

The story is the same for foreign investors in Wall Street. In the jargon, the long-term bull market is not over until these two groups are 'overowned'.

The last time the combination of overvaluation and underownership occurred was at the beginning of the Sixties as President Kennedy was inaugurated. What followed was a consumer goods-led bull market.

Not this time round, according to Mr Farrell. Out go drugs, foods and banks. In come speciality steels and chemicals, telecoms and computer software as the US rebuilds its industrial technological base. There is an obvious message here for investors in other stock markets.