Bulls appear likely to keep going to the head of the class

All across this country, people are graduating, and they are hearing guest speakers tell them that they are going forth. As a parent, I am concerned as to whether you know where ``forth'' is. Let me put it to you this way: ``Forth'' is not back home. -- Bill Cosby, commencement address, University of South Carolina

On Wall Street, the University of Bullmarket is still in session. It probably won't let out this summer, perhaps not even this fall. It's a four-year (and counting) program. It's a funny thing about students at U of B -- nobody seems to want to graduate.

Perhaps that's because ``going forth'' means attending a much more rigorous graduate-level program at Bearmarket School of Business.

In any case, last week's course work entailed riding a broad rally to record highs on all the indexes. The popular Dow Jones industrial average streaked ``forth'' to a new peak of 1,882.35, before a bit of profit taking on Friday trimmed the total to 1876.71 at the closing bell. The Dow tally for the week: up 53.42 points in four trading sessions.

To the delight of technical analysts and blue-chip investors alike, even the perennial foot-dragger, IBM, joined this rally. The stock had become so cheap that the company decided to invest in itself and announced a buyback plan last week. IBM shares promptly shot up nine points in heavy trading during the week.

And investors weren't fazed by the merger agreement signed by two of IBM's largest competitors, Burroughs and Sperry. Since the two companies' computer systems are incompatible, analysts are not sure that bigger will mean better.

Where does the market go from here? ``I think we'll test 2,000 sometime before the end the year,'' says Byron Wien, Morgan Stanley & Co.'s US investment strategist. Not a particularly presumptuous prediction, considering the 6 percent rise of the last week or so of trading.

Which stocks will lead a charge, however (assuming it occurs), is the subject of some debate. Interest-rate-sensitive issues? Or equities that benefit from an economic uptick?

Mr. Wien opts for the first category for now. ``The economy is going to be sluggish through the summer and pick up later this year. It's taking longer than expected for the effects of the lower dollar to be felt.''

Indeed, Wien describes the economy of the last several years as a two-humped ``camelback expansion.'' The first hump was formed by a spurt in capital spending prompted by the Economic Recovery Tax Act of 1981. Since mid-1984, he says, the economy has been in a growth recession. ``The second hump is about to begin.'' To get things going, he thinks interest rates will have to drop again. He opines: ``Interest-sensitive and disinflation issues will have one last surge.''

Last week Henry Kaufman, chief economist at Salomon Brothers, also predicted the Federal Reserve Board will chop the discount rate.

But on Thursday the Commerce Department reported a sizable 1.5 percent jump in the April index of leading economic indicators. That suggests business does not need the stimulus of a rate cut.

``I suspect we won't get a rate cut in the next few months,'' says Eric T. Miller, chief investment officer at Donaldson, Lufkin & Jenrette. His Fed Watcher report: Unless the data in July look sloppy or unless the Japanese and Europeans cut their interest rates, the Fed will stand pat.

Mr. Miller says the economy has a ``better tone,'' stronger ``underlying demand'' than most believe. ``The odds of getting some increase in rates by mid-July or August are fairly high.''

Thus Miller's stock picks tend toward cyclical companies that should show heftier earnings in the second half of the year. But he warns, ``Many of the cyclicals look fully priced, even on a 1987 earnings basis.''

This week, the Senate will debate its version of tax reform. A final compromise bill could be in the offing by August. That, too, could have some influence on the economy and financial markets.

``It's a long-term positive for the market,'' says Wien. If the Senate proposal is similar to the final bill, it would eliminate many tax-sheltered investments and provide an average 6 percent tax cut for individuals. The combination could push more money into stocks and bonds.

Shorter term, cutting the top corporate rate from 46 to 33 percent would help some businesses and hurt some, and some could lose valuable deductions, like investment tax credits and some entertainment expenses.

On balance, passage of the Senate's bill might delay some capital spending and slow economic growth through mid-1987, says Miller. But he adds, ``By extending the economic cycle and increasing the potential for lower interest rates, it might elongate the bull market.''

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