January Rally On Stock Market Unfazed by News

BAD economic news. Good economic news. News from foreign flash points. So far this year, nothing seems to stop the rise in stock prices in the United States.

This week it was good news. Statistics out of Washington Tuesday showed that industrial growth was higher in December than economists had anticipated.

Industrial production shot up 1 percent in December, faster than in any month in the past two years. Meanwhile, US factories were operating at their highest level of capacity - 85.4 percent - in more than 15 years.

``The economy is very strong right now,'' says David Hale, chief economist with investment house Kemper Securities Inc., in Chicago. ``The economy will eventually slow; but there's just a lot of momentum in the system.''

The stock market greeted this week's economic news with only a tad of concern.

``A lot of the [manufacturing activity] in December may have come from prior expectations that consumer spending was going to remain strong,'' an effect that economists call ``inventory accumulation,'' says Gary Thayer, senior economist with investment house A.G. Edwards & Sons Inc., based in St. Louis. ``But retail statistics for December were down. And now some companies are announcing modest cutbacks in production.... The economy may be starting to slow,'' or will soon do so, Mr. Thayer says.

`Bad news' is good

December retail sales were slower than anticipated. Claims for first-time unemployment benefits hit a six-month high.

But last week's ``bad news'' about slower consumer spending was especially ``good news'' for Wall Street, notes Larry Wachtel, a vice president with New York-based Prudential Securities Inc.

The consensus here is that the US economy will almost certainly slow in 1995 as a result of the six interest-rate hikes undertaken last year by the Federal Reserve. Thus, analysts at New York's Salomon Brothers now anticipate that real growth will run 2.8 percent this year, compared with around 4 percent last year. Slower growth can benefit stocks, which traditionally provide a better yield than bonds once interest rates stabilize.

Both stock and bond markets rallied last week, although bond prices fell earlier this week on reports of the higher production figures. What impressed many analysts, however, was that broader measurements, such as the Nasdaq Composite Index, kept going up. The narrow 30-stock Dow Jones industrial average, posted a modest loss. And the loss on the S & P 500 was even smaller.

Fed watchers wonder

Thayer, of A.G. Edwards & Sons, does not expect the Fed to raise interest rates later this month. ``The slower retail numbers, the slow growth in the nation's money supply, plus the weakness in [the price of gold] suggest that the Fed is ahead of [the battle against] inflation, not behind it, as was the case last year,'' he says.

Mr. Hale, for his part, believes that the Fed will tighten rates slightly this month but will then back off from additional increases until spring.

One factor seems evident: The attention of US financial markets is now riveted largely on the direction of interest rates, rather than overseas political and economic issues, including the Russian assault against the rebel republic of Chechnya, the plunge in the value of the Mexican peso, and the decline in the Canadian dollar, Mr. Wachtel says.

``Wall Street doesn't know what should be done about Chechnya,'' he says. ``The decline in the value of the Canadian dollar has been an on-going thing ... only the collapse of the Mexican peso was unexpected.''

``Everything has been gradually coming together'' in a positive sense for the stock market, says Gene Jay Seagle, president of Tactics & Technics, a market consulting firm in Weston, Conn. ``The movement of investment capital into the US in the past few weeks following the turmoil in Mexico is proof that our [stock] market is pretty strong.''

He predicts that the Dow will move above 4,000 during 1995.

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