Zigzag Course Seen for US Stocks

Slow economy and high price/earnings ratios make investors wary after Nov. 15 drop

THE United States stock market is expected to be buffeted by continuing uncertainties about the underlying stability of the US economy.The upshot: The market - as measured by the popular Dow Jones industrial average - is expected to make a lot of "zigs and zags" during the weeks ahead, according to Hildegard Zagorski, a vice president with Prudential Securities Inc. Investors breathed a sigh of relief Nov. 18, when the Dow average closed at 2,972.72, up 29.52 points. On Friday, Nov. 15, the stock market had nose-dived 120 points, closing at 2,943.20 points. That was the largest one-day decline since Oct. 13, 1989, when the market plunged 190 points. Early this week, however, there had been concern that the market might do worse than 1989 and repeat the severe market downturn of late 1987. On Monday, Oct. 19, 1987, the market plunged 508 points, following a drop of 108 points the prior Friday. Although the Friday-Monday pattern of 1987 didn't repeat itself this year, that does not mean that stock prices are no longer vulnerable. Far from it. Investors are now glued to daily press reports about the well-being of the economy. "There are just a lot of questions being asked now: about whether there could be a double-dip recession, whether the economy will keep growing, what happens to interest charges on credit cards, and countless other things," Ms. Zagorski says. Last Friday's 120 point downturn "was not the end of the [current] bull market; but it does add up to a little bit of a lull." "I don't think I've ever seen so many [adverse] factors come together at one time as happened last week," says Gene Jay Seagle, an official with Gruntal & Co., an investment house. Program trading was a factor in the downturn, he notes, as was a press report that General Motors Corporation's dividend might be cut in the next few months. He also mentions the recent vote by the US Senate to cap interest rate charges on bank credit cards at 14 percent, the collapse of the speculative biotechnology stock sec tor, and "a rumor about a possible new Soviet coup." Put all of that together with evidence of weaknesses in the US economy, says Mr. Seagle, and there were more than enough ingredients for the downturn of Nov. 15. Still, he insists, this "is not a replay of 1987, or even 1989." Current interest rates, Seagle notes, are far lower than they were in 1987, which means that there are fewer places for investors to put their money than was the case back then; moreover, trading curbs circuit breakers have been imposed on the stock market to prevent the type of "free-fall" that occurred in 1987. The trading pattern early this week suggests a movement out of more marginal "secondary" stocks, such as issues traded on the NASDAQ over-the-counter market, and back towards the blue-chip stocks traded on the New York Stock Exchange. "A new [market] leadership structure appears to be emerging," says Seagle, "including insurance, pharmaceuticals, and food stocks, plus some utilities, which are showing good returns." Still, it is the underlying weakness of the economy that has investors watching their market reports: * More companies continue to post layoffs. Economists say that many of the professionals given pink slips this year are not expected to return to their jobs, since the unemployment reflects structural changes in key industries such as banking, insurance, and finance. * Consumer confidence remains low. Retailers, whose biggest season is the Christmas holiday period, are braced for sluggish sales. * There is widespread concern that the government's third-quarter preliminary growth statistics - which showed the US economy expanding 2.4 percent in the period from July through September - will be revised downward. According to analysis by Heiko Thieme, an economist, disappointing data from September were not fully taken into account. Most economists continue to believe that the economy is out of recession and growing, although modestly. The US should be posting growth of about 2.5 percent next year, according to DRI/McGraw-Hill, an economic consulting firm in Lexington, Mass. Economists note that the stock market may not be as much of an indicator of future economic trends as it once was, given the flight of small investors and the rise of specialized markets such as futures and options. Lacy Hunt, an economist with Carroll McEntee & McGinley Inc., notes that the stock market misread the economy in both the 1987 and 1989 downturns. The economy grew by an annual rate of 4 percent in the first half of 1988, following the 1987 market drop; again, the market grew following the downturn in late 1989, although only slightly. One negative factor is the ratio of the price of stocks to the per-share earnings of companies in the previous 12 months. After the Nov. 15 drop, the price/earnings ratio of Standard & Poor's 500 stock index was an expensive 21 - much higher than usual.

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