Bulls Still Stomping, but Bears Point to Rates


Talk of higher interest rates hasn't scared all the bulls away.

But it does have some of Wall Street's top strategists predicting downward or sideways moves for stocks - for this week and for the rest of the year.

Interest rates on long-term bonds could hit 7.5 percent this year, and "I don't think the stock market can handle that strain," Byron Wien, chief strategist at Morgan Stanley, told investors in Boston Saturday.

Here's how the theory goes: When interest rates rise, that's bad for stocks. It means companies pay more to borrow money. Further, higher yields on bonds make them more attractive relative to stocks.

But Abby Joseph Cohen, the strategist at Goldman, Sachs, told the same crowd that higher rates didn't scare her.

"This profit expansion is not over," she said. Don't measure the strength of this bull market by time - it's six years or more old - but by the quality of earnings.

She sees the Dow Jones industrial average at 7500 a year from now, and earnings remaining strong through 1998.

"The impact [of higher rates] on the market is likely to be transitory," she predicts. That's a daring view, but her recent calls have impressed many investors with their accuracy and made her one of the most widely watched analysts.

Mr. Wien sees stocks headed higher before July, despite rising rates, but then ending down for the year.

He sees too many investor dollars chasing relatively few high-growth companies: the likes of Intel and Microsoft.

This bull market has not been a broad one. Small-company stocks have not kept pace.

Wien doesn't see that changing until after the market has a correction, a drop of 10 percent or more.

Charles Clough, Merrill Lynch's strategist, also sees danger signs for stocks, and not just from interest rates.

He says corporate earnings will come under strain if companies cut prices in an effort to boost sales.

"Watch the revenue line as carefully as the earnings line," he warns. Companies with growing sales will have an easier time.

He says bonds look attractive despite rising rates.

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