No Big Thrust in Inflation Lets the Fed off the Hook

Stagnant retail sales keep interest rates low, but spell bad news for consumer-goods companies

LAST week's good news on inflation - wholesale prices in May showed no upward movement - raised cheers throughout Wall Street.

"The market has been waiting to see which way" the arrows would point regarding inflation, says Gene Jay Seagle, vice president of Gruntal & Company Inc., an investment house. The May numbers for the Producer Price Index showed little inflationary thrust in the economy. And that in turn takes the pressure off the Federal Reserve Board to push up interest rates, which was good news to the investment community.

Presumably, Mr. Seagle says, the Consumer Price Index, which comes out tomorrow, will match the Producer Price Index in showing minimal, or only moderate, inflationary pressures. But that is not to say that the market - which has been pushing the 3,600-point level on the Dow Jones industrial average - is free of challenges, experts say.

This particular bull market is 30 months old and the economy is posting stodgy growth. The Commerce Department announced Friday that retail sales barely inched upward in May, growing at a 0.1 percent rate after jumping a revised 1.5 percent in April.

While the stagnant May retail results bolstered the case against the Fed needing to raise interest rates, the low numbers did not come as happy news for large United States consumer-goods companies, which depend on the willingness of Americans to make big-ticket purchases.

"There's been just a great deal of fear and trembling" regarding the direction of inflation and interest rates, says Larry Wachtel, a vice president with Prudential Securities Inc. "This market is definitely getting tired, and it's now moving in fits and starts," with even relatively minor developments sending popular indexes such as the Dow up or down.

That happened June 10, when the 3M Company announced that its quarterly earnings ending June 30 will be lower than expected, helping to lower the Dow Jones industrial average 20 points.

The stock market has been heading upward this year. In January the Dow fell below the 3,250-point level. But on May 27, it hit 3,554.83 points, an all-time high.

Other indexes, including Standard & Poor's 500 and the Nasdaq composite index, also have been moving up. But so too have gold prices, which often presage higher inflation.

Given high share valuation levels - with the price-to-earnings ratio on the Dow now standing at a high level - and the length of this particular bull market, the current trading environment warrants a great deal of caution, Mr. Wachtel says.

Still, he says that for now there is "nowhere else to go," except equities, in terms of return on investment.

Certificates of deposit and money market accounts, for example, continue to pay far lower returns than stocks; commodities such as gold and silver are subject to day-to-day price fluctuations and risk; the bond market is edgy about the course of long-term interest rates.

Given such factors, Wachtel says that the stock market will remain the primary investment market in the US through 1993 and into 1994.

The market is undergoing a major transformation: The emphasis on consumer stocks, which has been a mainstay of investing strategy in recent years, is being replaced by a greater emphasis on capital-goods companies, says William Raftery, a vice president of Smith, Barney, Harris, Upham & Company, an investment house. Investors, he says, are quietly shifting their money to what are considered more profitable companies.

A report, written by several top investment experts, has been privately circulating around brokerage houses on Wall Street in recent weeks.

The document reportedly suggests parallels between the current market environment and that of 1929, just before the market crashed.

Most experts, however, say that a repeat of 1929 is unlikely. Even market "enthusiasts," such as Seagle of Gruntal, who says that the Dow could reach 3,600 points this year, concede that there could be a modest correction.

But most experts insist that - barring the unexpected - the US economy should continue to expand slowly. And that should propel gains within the stock market.

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