Wall Street Unfazed By Europe's Turmoil

SO far so good. The foreign-exchange crisis and the steep price decline on European stock markets this year has not hurt United States securities prices.

"The [US] market has adjusted itself to Europe's currency problems," says Dennis Jarrett, vice president of technical analysis for Kidder, Peabody & Co. He says the market here had already discounted this weekend's French referendum on the Maastricht Treaty, which calls for closer monetary links among European nations. France voted narrowly in favor of the treaty.

Wall Street concluded a week or more ago, adds Mr. Jarrett, that "no matter how the vote came out on the treaty, European nations are going to have to make further adjustments in their exchange-rate agreements." Moreover, the adjustments will presumably include "further interest-rate reductions," which should give a boost to the European and North American economies.

Last week the US stock market initially rose on news of the modest reduction in interest rates made by the Bundesbank, Germany's powerful central bank. But then the market dipped, following the disarray over monetary policy among European central bankers. By the end of the week the US market had stabilized, with the Dow Jones industrial average closing at 3,327.05. That closing produced a gain for the week of 21.35 points.

"The perception here is that European interest rates will go lower," says Hildegard Zagorski, an analyst with Prudential Securities Inc. Lower rates abroad will "allow the Federal Reserve Board to once again lower rates here." Moreover, as European economies recover from recession, they will be able to buy more US exports, she says, aiding the US economy.

Ms. Zagorski expects a rally for the US market during the next few weeks. Still, she says investors should be cautious. "I don't think the rally will last. After all, the Fed has repeatedly cut US interest rates" and yet there still has not been a "full turnaround" in the US economy. "What makes us think a new round of lower rates here will do any better?"

Impediments to a US turnaround, Zagorski says, include a restructuring of some industries that is resulting in substantial unemployment and high levels of public and private debt.

"The market is vulnerable to a sell-off," says Sam Stovall, who tracks US industrial sectors in the Standard & Poor's 500 stock index. "We [S&P] expect the Dow Jones industrial average to stay in a relatively narrow trading range of about 200 points." But the Dow could tumble to the the 3,200-point level, he says.

In mid-August, Standard & Poor's Corporation lowered its model allocation for securities holdings. Instead of having 60 percent of a portfolio in equities, Standard & Poor's model now suggests 55 percent. The bond component of the portfolio rose to 35 percent from 30 percent; cash stayed the same, at 10 percent.

The investment house of Donaldson, Lufkin & Jenrette Inc. also is recommending a conservative portfolio model - 50 percent equities; 40 percent fixed-income, and 10 percent cash.

One of Mr. Stovall's main technical concerns is the declining number of stocks participating in recent market rallies. He says that is a sign of a market that may be peaking.

Still, Stovall sees a number of stock sectors as promising. They include long-distance telephone carriers, such as AT&T and MCI, and paper and forest-product companies.

With the anniversary of the severe Oct. 10, 1987 stock market market crash coming soon, Stovall notes that six of the 10 worst market declines recorded have taken place in October, including the infamous 1929 crash. But Stovall sees no immediate parallels between the 1992 market and the 1987 market.

Some economists and market technicians believe that fall market declines may stem in part from changes in corporate business plans - such as cutbacks in capital development projects - after boards return from summer vacations. The 1987 downturn followed a speculative market that had been soaring upward for months. The 1992 market to date has performed more like a roller coaster, with sharp ups and downs.

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