Analysts Look Cautiously to `94

THE Dow Jones industrial average continues to go where it has never gone before.

Last week the Dow soared past the 3,800 point range in very heavy trading and moved toward 3,900 points. The 30-stock index is expected to soar to the 4,000-point level later this year.

Rao Chalasani, chief investment strategist for Kemper Securities, Inc., for example, says the Dow might even climb to 4,100 points this year.

Besides the sluggish gains for other stock indexes, why is Wall Street not overly impressed by the Dow? ``The movement of the Dow is not all that important,'' says David Shulman, chief investment strategist for Salomon Brothers Inc. ``The Dow has been on the increase, but at the same time, the broader market continues to be flat - 1994 will be a very difficult year for equity investors.'' Mr. Shulman expects returns ``to be lower'' than in 1993.

What has to be remembered, experts say, is that the Dow measures economically-sensitive stocks, which tend to do well when the economy is growing. The 30 stocks on the Dow include such major blue chip industrial firms as Allied Signal, American Telephone & Telegraph, General Motors, DuPont, Philip Morris, Procter & Gamble, and Walt Disney. A solid gain by just one or two of the Dow stocks can help push the overall Dow index up.

At Dow Jones, they ``are the first to admit that the Dow is more heavily weighted toward a few cyclical stocks than broader measurements of the stock market such as the Standard & Poor's 500,'' says Arnold Kaufman, a vice president with Standard & Poor's Corporation. ``You'll note that while the Dow has been on the climb, the broader S&P 500 is still a bit below its high of 470.94 points recorded in late December.'' Moreover, the number of companies showing advances - that is, rising in stocks value - is ``about even with the number of companies showing declines. That suggests that the market is actually struggling to advance.''

Another measurement of the broad market, the NASDAQ composite index is lagging slightly below its all-time high. Mr. Kaufman predicts that the market will have a 10 percent correction sometime in 1994.

Salomon's Shulman also expects a market correction of around 10 percent. The 1994 trading range for the S&P 500, he says, will be between 420 points and 480 points. One factor holding the market back, he says, is the increase in corporate taxes, which is lowering earnings; corporate dividends, he says, are now growing at their ``slowest rate in over 20 years.''

``The stock market was actually more powerful a year ago ... than today,'' says Larry Wachtel of Prudential Securities Inc. Still, the important question is ``whether this is a good economic environment for equities in general,'' Mr. Wachtel says. ``The answer is yes.'' Interest rates continue to remain low. Last week's unemployment report, with the jobless rate falling, and the number of new job holders not rising as fast as expected, suggests that economic growth remains moderate.

Recent attention to the Dow Jones industrials has obscured new highs on the Dow transportation average that reflected strength in railroads. That index tends to anticipate future shipments. If shipments of industrial products are expected to be up, that points to a growing economy.

The bond market, meanwhile, has shown unusual turbulence in some recent days, alternating between worries about inflation - which hurt bond returns, and anticipation of moderate growth, which helps bonds. But the modest increase in nonfarm employment for December -

some 183,000 workers - offset worries about higher inflation. Many bond funds beat the average total return on equity funds during 1993, according to Lipper Analytical Services Inc. But Lipper is cautious about bond fund returns in 1994, since interest rates may head upward.