Cash is pouring in, but will it pour out?


June 03, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- As the stock market continues to test new highs, Wall Street should be reveling in its glory. Instead, many market analysts are gripped by a strange sense of unease

centered on one word: correction.

There is concern that the market may be ready for a 300- to 400-point dip in the Dow Jones industrial average -- a large figure but one that would represent only a 10 percent drop. By contrast, the Dow fell about 30 percent in one day during the 1987 crash.

Analysts are worried by a string of recent events, including:

* A re-evaluation of the amount of money flowing into the market from low-yielding money market accounts and certificates of deposit. Although these amounts are at record highs -- and thus supposedly guarantee an ever-rising market -- they are in fact low relative to the size of the market.

* Concern that most investors joined the three-year bull run late in the game and may be quick to leave the market at the first sign of trouble.

* The unpredictability of many blue-chip stocks, a situation that often typifies the end of a bull market and makes it harder for lay investors to choose investments. Over the past months, stellar performers have fallen about once a week, with the shares of companies such as Kellogg Co., Eastman Kodak Co. and Dell Computer Corp. taking poundings;

* The chance that the trigger for a market shake-out may be lurking in the form of inflation, which has been heating up.

"The market has been moving basically sideways-upward for the past few months," said David Shulman, equity strategist at Salomon Brothers Inc. "While we don't expect an end to the bull market, a correction is a strong possibility."

Many analysts have been arguing that such a correction is unlikely in the near future because the market has no place to go but up, thanks to all the money flowing in from low-yielding time deposits. Stock mutual funds, for example, took in $11.6 billion in net new cash in April, the biggest inflow ever and a rise of $300 million from March, according to the Investment Company Institute.

The result of this has also seem incontrovertible: record highs for the stock market. Yesterday, for example, most measures of the stock market closed near record highs, with the Dow Jones industrial average finishing the day at 3,553.45, just 1.38 points off its record. A broader measure of the market, the S&P 500 index, also closed in record territory, at 453.85. The Nasdaq over-the-counter stock index closed at 705.8, 3.05 points shy of its record.

On closer analysis, however, the figures may be telling another story, said James A. Bianco, research director at Arbor Trading Group in Chicago.

The amount of money flowing into the stock market each month, for example, is just one-tenth of 1 percent of the market's capitalization. And all the money that consumers have stashed in CDs, money markets and bank accounts -- money that the financial industry says can flow only into the stock market because of the low returns available through safer investments -- is actually, from a percentage standpoint, at a 35-year low.

Lumped together, all the money in CDs, money markets and bank accounts at the end of March totaled $4.1 trillion, or about 48 percent of the total stock and bond market capitalization of $8.6 trillion. Three years ago, the figure was more than 70 percent.

"The whole point is that this 'inevitable' flow of funds out of CDs and into mutual funds is not as large as you think when you compare it to the size of the stock market," Mr. Bianco said. "The stock market today is huge, so a few billion dollars a month isn't really going to have an impact on it."

In addition, much of the money that has flowed into the market has been late coming, meaning that many investors have made little money on their stock purchases. Since the bottom of the bear market in October 1990, the Dow has risen from 2,365 to yesterday's close of 3,553, a stunning 50 percent rise.

But on average, the newer investors in mutual funds have bought at 3,230. So their investments have risen only 10 percent. 10 percent correction, something that even bullish forecasters do not discount, would wipe out these gains -- giving the newer investors effectively an even lower return than the much-scorned CDs -- and could start eating into some investors' principal.

"These people didn't just invest late," Mr. Bianco said. "They invested way late. When they find they have gained nothing from the market and maybe even lost some, they may pull out, which would further drag down stocks."

The possibility is one that the mutual fund industry is taking seriously. At its annual meeting last week in Washington, some industry officials said they were starting an education campaign to get their customers used to the market's risks, so the novice investors do not withdraw their money after a downturn.

The catalyst for such a correction could well be inflation.

Although few expect a serious bout, inflation is averaging more than 4 percent this year, a full percentage point above most earlier predictions. Although the rate should decline, it may be enough to force the Federal Reserve Board to jack up interest rates a notch or two, which would make bank deposits more attractive than in the past.

Edginess over inflation will make next week's report on the increase in the Producer Price Index one of the year's crucial guideposts for the stock market, according to Richard Bernstein, manager of quantitative analysis for Merrill Lynch & Co. Inc. A good report could send the Dow up to further record highs. But in case of a bad report, the market could respond "overwhelmingly poorly."

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