Where's Dow headed? It's anybody's guess

SUNDAY OUTLOOK

September 04, 1994|By Patricia Horn

While many of Wall Street's top traders take their annual summer holiday, the market has decided to come back from its own and get back to work. In the last two weeks, the stock market has surprised Wall Street by staging a rally. The Dow Jones industrial average -- an index of blue-chip stocks -- has climbed more than 160 points since Aug. 22. It has now edged past the 3,900 mark, pulling closer to its all-time high of 3978.36. What's put the pizazz back in the market? Where will it close the year? And can the Dow reach 4,000 in the near future?

William L. Paternotte

Chairman, Investment Committee, Alex. Brown & Sons Inc.

I look at the stock market and see two forces that have had the most impact in recent months: interest rates on the one hand and a surge in corporate earnings on the other. Those two forces have been playing off each other, with interest rates pushing the market down and earnings pushing the market up.

What has happened since the end of June -- the S&P 500 has been up about 6 percent since then -- is that investors have reconciled themselves to higher interest rates. Most people now assume that interest rates will not rise substantially before the end of the year and so now they can focus on the positive news coming out of corporate America, that earnings are strong. Along with that, the numbers don't show a great deal of evidence of renewed inflation.

The market -- as measured by the S&P -- has been flat this year, or up slightly. But if you look at what the market has done relative to corporate profits -- corporate profits are up around 20 percent -- then valuations are still pretty reasonable.

I personally feel that, through the end of this year, the market will trade within a range of 5 percent or so of this level. We are using that as our operating assumption.

Alfred F. Kugel

Senior Investment Strategist, Stein Roe & Farnham

The key thing in this whole outlook is that the economy is going to slow and one can only speculate how much, and when, and how far it will slow. We've had a 4 percent real rate in last 12 months. The Federal Reserve is determined to slow that down to a 2 1/2 percent rate, a so-called sustainable noninflationary rate.

If the economy doesn't slow down of its own accord, the Fed will continue to tighten by raising the short-term rate. We think that the Fed is going to sit down and wait a bit until after the election, and then there may be at least one more move before the end of the year to get the rate up to 5 or 5 1/4 .

The first few times interest rates rose, the bond market didn't like it, but the last time the hike was considered favorable because they saw it heading off potential inflation in 1995. Our view is that bonds are more attractive than stocks, and look for stocks lower by end of year and the bond market higher.

The anecdotal evidence on the rise in the stock market is that money has started to flow more heavily back into equity mutual funds this month. Funds managers allowed cash to build up in ZTC the last couple of months, but with all this new money, they were afraid of being caught with too much cash, so they had to put some in the market.

With a lot of traders and investers away on holidays, making it a thinnish market, any coordinated move will be exaggerated.

Four thousand is not very high for this stock market, but I don't think that is sustainably higher for the next several months. Between now and the year end, I think the market is more likely to have another down leg.

Jeffrey D. Saut

Director of research, Ferris Baker Watts

Where will the Dow be at the end of the year? I have no idea.

Right now there are more buyers than sellers. The public continues to throw money at the stock market. Nine billion flowed into equity mutual funds last month. Over the last three years, $288 billion has flowed into stock mutual funds. Mutual funds managers are paid to play; they are not paid to sit on cash. The public -- ever since the 1987 crash -- has been conditioned to buy the stock market when it goes down. They are chasing equity. Time will tell in long run whether that is the right move.

I don't know where the New York Stock Exchange will be at the end of the year, just like I don't know where Jimmy Hoffa is. It feels to me that it is so close to old highs, that it is going to make a run at them. But that is liable to be a solitary run of the Dow. I've been in the business 25 years. If you look at the market from a valuation standpoint -- the price-to-book or the price-to-dividend ratios -- based on those, stocks are optimistically priced. And yet, I am still able to find many attractive, individual situations.

My advice to readers is to assume the market is going nowhere and invest in specific companies where you believe prospects are bright.

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