[ No headline ]

THE stock market, measured by the Dow Jones industrial average, has been on a rampage since early December of last year - blasting from around 2860 points to the current 3200 point range. That rise occurred during months of economic sluggishness with stocks widely seen as the only financial game in town. Investors watched interest rates on bank certificates of deposit slip to the level of interest on passbook savings accounts.

With the economy posting signs of recovery - and long-term interest rates moving upward - can the stock market's momentum continue? The general view on Wall Street is that the market will continue to inch upward. Markets generally rise during election years because policymakers tend to support programs geared to economic growth. But warning signs are flashing, suggesting a correction may be not far off.

"The market has come just a very long way in the past few months," says Hildegard Zagorski, an analyst with Prudential Securities Inc. Long bond yields, she notes, are approaching 8 percent; rates above 8 percent could adversely affect the housing market, she says. Moreover, growth stocks are "under the gun, with investment house money managers taking their profits."

"The market is very vulnerable to a correction," holds Arnold Kaufman, editor of Standard & Poor's "Outlook," a market report. "The Dow has been showing relative strength, whereas broader indexes, such as the S&P 500 and the NASDAQ composite index have been holding well below their 12-month highs." Such a divergence, says Mr. Kaufman, "means that we could be in for a correction of 10 percent or so if the broader indexes don't soon confirm the strengths in the Dow."

The ratio of stock prices to earnings on the S&P 500 is around 25, using earnings reports from the past 12 months. A more typical P-E ratio is around 16. The current high number is explained in part by unique 1991 accounting charges, Kaufman says. Remove the charges and the P-E ratio falls to around 21.3. But even that lower figure is not too far from the P-E of 22 registered "at about the peak of the stock market" shortly before the market crash of October 1987.

How concerned is Standard & Poor's? Three weeks ago the company moved its recommendation for a model portfolio from a 60 percent position in equities to 55 percent. Cash reserves were boosted to 15 from 10 percent, with bonds staying at 30 percent. "We're not counting on another imminent cut in interest rates by the Federal Reserve Board, or any new fiscal stimulus package out of Washington," says Kaufman. Moreover, he says this particular phase in a recovery tends to be an economic zone "when market cor rections often appear." That is, the economy is inching upward and interest rates are slowly rising, but investors are not yet getting the benefits of corporate earnings gains. In such a climate, Kaufman says, many institutional investors are prompted to take profits.

Still, many analysts here expect market prices to go up. Dennis Jarrett, chief strategist for Kidder, Peabody & Co., sees the S&P 500's halt as merely a "pause." Gene Jay Seagle, chief market technician for Gruntal & Co., an investment house, projects that the Dow will reach 4,000 by November.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK