WILL storm flags soon be flying on Wall Street?
Despite better-than-expected corporate earnings reports for a number of major companies, continued modest economic growth, several expensive new initial public offerings (IPOs) of stock, and relatively low inflation, the United States stock market is again showing signs of contrariness - if not weakness, experts say.
Brokerage officials are at a loss to explain why the market did not surge late last week, following a burst of favorable earnings reports. Blue-chip stocks were roiled throughout the week, although high-technology issues, many of them listed on the Nasdaq "over-the-counter" market did well. Still, the consensus view is that the favorable earnings momentum should eventually propel the overall market higher.
"The strong corporate earnings reports are just what this market has been waiting for," says Gene Jay Seagle, president of Tactics and Technics, a private market consulting firm in Weston, Conn. "The reports should set this market loose. Market [gains] will now be faster than expected, with the Dow [Jones industrial average] moving into the 6,000 point range this summer."
"The earnings reports are a definite plus," says David Blitzer, chief economist for Standard & Poor's Corp., a financial services firm in New York. "So far they're running slightly ahead of the first quarter of 1995, which I hadn't quite expected. I'm looking for [earnings for 1996] to come in around 8 percent to 10 percent over last year."
Yet, there is also lingering unease as to whether this bull market, now in its fifth year, can continue. Last week's weakness in the blue-chip Dow was a downer to many investors. The market has skyrocketed up and down this year, incurring repeated turbulence. In mid-April, investors watched the Dow sag southward for five consecutive days, the first time the index had done that since August 1995.
"The problem now is what happens to interest rates. Rates will probably bounce around. I wouldn't put your hopes on them coming down, which is not a plus for the market," says Mr. Blitzer. Investors prefer a climate of low or falling rates, since companies are then more likely to borrow and expand, raising long-range earnings.
"I don't really know what is happening with this market," says one longtime brokerage firm analyst here, speaking off-the-record. "My company is saying that we're going to get a higher stock market, but I have my private doubts."
"The [Open Market Committee of the Federal Reserve] may not choose to lower rates, but few people are now worrying about the Fed actually tightening rates," says Mr. Seagle.
On Friday, the Dow closed at 5535.48 points, down 16.26 points for the day. But the Nasdaq composite index rose 2.40 points to close at 1,138.70, a new high.
Companies turning in solid first quarter earnings include AMR (American Airlines), Gillette, McDonald's, American Express, Amgen, Sears Roebuck, Microsoft, Kellogg, General Electric, and Schering-Plough.
Besides hefty earnings, the market is being propped up by a number of additional factors, says Hildegard Zagorski, an analyst for Prudential Securities Inc., New York.
*Mutual-fund sales, particularly sought out by baby boomers salting away money for retirement, have been consistently steady .
*Several key economic sectors, including high technology, pharmaceuticals and biotech, are turning in strong gains.
*Alternatives to stocks remain either unattractive, such as low-paying certificates of deposit, or risky, such as bonds.
The "frequent rotation" in stock gains, with different sectors doing well on certain days, such as occurred with technology stocks this past week, is a positive underpinning for the market, says Zagorski. The sectors "cushion everything. Instead of the entire market falling apart."
While market advances should continue, there will also be more turbulence, says Gregory Nie, chief technical analyst for Everen Securities Inc., a Chicago-based investment firm. He doesn't rule out a correction of 10 percent or less in 1996.