Stock Market Still Shaking and Rolling

IT was ``shake, rattle, and roll,'' as the old rock song put it, on the stock market again this week. Stock prices were jumping about, and analysts were trying to figure out why. A. Gary Shilling, one Wall Street economist, reckons the excitement in the stock market ``may be simply the onset of the usual recession-related decline.'' He figures the market slide may have ``much further to go,'' especially if he's right in his forecast of a global and deep business slump.

The Commerce Department offered some evidence of further economic slowdown Wednesday. It reported that orders for durable goods, such as major home appliances, slipped 0.1 percent in September. It would have been worse but for a jump in orders for military equipment, with the Defense Department evidently trying to beat the end of the fiscal year. Numerous factors, of course, influence the stock market.

One is profits. The news in this regard has been bad this month, as company after company reported reduced profits or even losses. ``I am amazed the stock market has held up so well, considering the profit numbers are so disappointing,'' says Mr. Shilling.

Another factor is foreign investment. James J. O'Leary, an economic consultant for the United States Trust Company, a money management firm, notes that foreign investors, after a tiny disinvestment in the first quarter of this year, were large net investors in US corporate securities in the second quarter, adding stocks to their porfolios at a seasonally adjusted annual net rate of $11.4 billion. He figures foreigners bought a lot of US stocks in the third quarter as well.

But did they after Oct. 13, a day when the Dow Jones industrial average plunged 190 points?

Foreign investors backed off following ``Black Monday'' - Oct. 19, 1987 - when the Dow dropped 500 points. They dumped US stock at a $24 billion annual rate in that quarter, after investing at about that rate or even higher in the prior three quarters. Foreigners eased out of the market modestly in 1988 as well.

The Japanese had already slowed their foreign stock market investments this past summer. According to Robert Brusca, chief economist for Nikko Securities Co. International Inc., Japanese investors put a net $3.3 billion abroad in June, $2.1 billion in July, and only $1 billion in August.

Though no more recent statistics are available, Brusca says of Japanese investors: ``There is some sense they have backed off stocks.''

Foreign investors generally did extremely well in the first three quarters of this year with their US stock portfolios. The total return (dividends and capital gains) on Standard & Poor's 500 common stock index was nearly 29 percent in those nine months. In addition, the 14 percent rise in the US dollar against the yen gave Japanese investors a total average return of as high as 43 percent (that return, of course, would depend on the actual stocks they owned). West German investors could have had a total return of as much as 36 percent, Dr. O'Leary calculates.

``Little wonder, then, that foreign funds have been flowing strongly into US financial markets this year, and that the US dollar has shown so much strength,'' he says.

It is also no surprise that Japanese investors do follow closely the prospects for dollar's foreign exchange rate.

However, Mr. Brusca holds that such foreign investment flows are completely overwhelmed by the wave of mergers and aquisitions. These events tend to take stock off the market as companies go private. Some $131 billion of stock was removed from the US market in this fashion in 1988, $77 billion in 1987, and $81 billion in 1986.

One theory is that this makes stocks scarcer, potentially pushing up their price.

But Shilling says his research has found no correlation between either the supply of stock (as influenced by mergers and acquisitions and new issues) or foreign investment and stock prices. He's convinced that such ``fundamentals'' as the status of the economy, price-earnings ratios, and interest rates are more important to stock prices. That, plus the ``herd instinct'' of investors, can overwhelm everything else. He's anticipating a slow but relentless decline in prices over the next months.

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