Market Caught Up on Basics, Drops
THE 97.9-point decline from the peak last week in the Dow Jones industrial average did not surprise some analysts.
While stock prices rose some 33.5 percent last year, the economy has been crawling at a real rate under 2 percent. ''What's fundamentally behind the market's rapid growth has been our getting back to a 10 to 12 percent return on corporate capital, and the positive look ahead this gave,'' says Richard Kopcke, a financial-markets economist at the Federal Reserve Bank of Boston. Now he expects the market to cool down because it has ''caught up on some basics.''
Ten to 12 percent was the average annual return on corporate capital in the 1960s, Mr. Kopcke says, but the rate was ''halved'' for the 1970s and early 1980s. The corporate-profits recovery since then helped stocks rise strongly.
The huge sums of money pouring into stocks through mutual funds and retirement accounts can not alone fuel ever-higher stock prices, he says.
The Dow hit a record 5,601.23 on Feb. 13, declining to 5,503.32 by Friday.
Looking longer term, some analysts warn against getting bearish. The market is high, but there are still some good investments to be made, says Benjamin Edwards, head of A.G. Edwards & Sons, an investment house based in St. Louis.