Market Still Strong, for Now
DOW AFTER 8000
NEW YORK — Wall Street is having a heat wave, as the stock market sizzles to new highs.
But amid the exuberance come cautions that stocks may be overvalued. Individual investors should think twice about jumping on the bandwagon.
Top officials of brokerage houses here were hardly surprised Wednesday when the Dow Jones Industrial Average again set a new high and roared through the 8000 point mark.
Market strategist David Shulman of investment house Salomon Brothers believes stocks are being pushed forward by a "near-perfect economic environment" of reasonably strong economic growth and low inflation.
Next stop for the Dow, according to Mr. Shulman, could be 8500 points. But he is not among the optimists. In fact, he thinks the market is headed for a sharp downturn.
He is among those described on Wall Street as "fully invested bears," analysts who ride the upward wave in stock prices but think it's too good to last.
Shulman sees the possibility of a 20 percent decline in the Dow in the months ahead, as the current surge loses steam.
Shulman is not alone in seeing storm clouds on the horizon.
"The Dow could reach at least 8200 points in the next few months," says Rao Chalasani, chief strategist for Everen Securities, Chicago. "A correction is very possible, however," he adds.
"Valuation levels are very high, and in the case of many stocks, way out of line" with what investors are willing to pay to scramble aboard the market.
Mr. Chalasani believes a pullback would be in the "normal range" - somewhat higher than 10 percent - and thinks investors should hunker down.
His advice: Monitor valuation levels for stocks. When those levels climb unusually high, some selling might be appropriate. If you plan on buying stocks, proceed with caution.
It is precisely the flashing red-hot gauges on market indicators, such as valuation levels, that worry some analysts here.
Stock prices for large companies in the Standard & Poor's 500 index, for example, are trading at around 22 times their earnings. The more typical level is around 13 percent.
The dividend yield on the S&P 500 is at 1.6 percent. A few years back anything below 3 percent would have been considered a "danger zone."
"I wouldn't want to advise anyone not to get into this market, because obviously there's some play left," says Richard McCabe, chief market analyst with Merrill Lynch & Co.
But Mr. McCabe believes that late this year, or early next, there could be a 20 percent to 25 percent pullback.
Merrill Lynch is both bullish and bearish.
"Our investment model is 50 percent stocks, 45 percent bonds and 5 percent cash," he says. "We're sort of saying, 'have a good part of your assets in conservative holdings of some type.'"
And, says McCabe, look for any hint of a shift in the market. "When you see it," he says, look for an escape route.