Some bulls struck by bear fever 'Major correction' anticipated in fall by one former optimist

Or can stocks keep rising?

Abbey Joseph Cohen and Ralph Acampora haven't lost faith

July 05, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

In November 1991, Don Hays stuck his neck out and predicted that by June 1996, the Dow Jones industrial average would soar more than 2,500 points and reach 5,600.

Hays, the chief investment strategist at then-Wheat First Butcher Singer, was right. Today, he sees a train wreck coming -- a drop of as much as 30 percent -- that would derail the longest-running bull market in history.

"We think a major correction is coming in the fall," said Hays, the strategist for Richmond-based Wheat First Union. "By October, we think you are going to see some major financial crisis in the world that brings the house of cards down."

Such bearishness seems extreme considering the major market indexes continued to advance impressively during the first half of this year.

But, as usual, there is no consensus on where stocks are heading over the next six to 12 months.

Some believe that the Dow Jones -- the most closely watched barometer of the stock market -- will spin its wheels, neither gaining nor losing much ground, and finish the year around 9,000 points.

Others see the economic problems in Asia causing the index to (( fall into negative territory for the first time since 1990, when the Dow closed down 4.3 percent.

And there are some who believe that the market will surge,

pushing the Dow to 10,000 points within the next 12 months.

"We are very bullish here and we are fully invested," said Joseph V. Battipaglia, chief of investment policy at New York-based Gruntal & Co. "I think we will see 10,000 before June of next year."

He's not the only bull.

Abbey Joseph Cohen, U.S. investment strategist at New York-based Goldman Sachs, expects the Dow to gain another 300 points this year. And Ralph J. Acampora, head of technical research at Prudential Securities Inc., sees the index hitting 10,000 next year.

The results for the first half of the year are impressive, and have exceeded most market watchers' expectations.

The Dow, which is made up of 30 blue chip companies, was up 13.2 percent for the first six months of the year, and it is on pace to beat last year's 22.6 percent increase.

The Standard & Poor's 500 index, which is a broader measure of large companies, jumped 16.84 percent, and is on track to surpass 1997's 31 percent return. And the Nasdaq composite index, the home for technology and health care stocks, has zoomed 20.66 percent, a pace that would smash last year's 21.6 percent gain.

There are many reasons that the market has moved higher. Interest rates have remained stable at about 7 percent; inflation is almost nonexistent; and the economy continues to grow. Federal Reserve Chairman Alan Greenspan recently called this a "virtuous cycle" that feeds upon itself.

Added to the mix, consumer confidence is at an all-time high, while unemployment rates are low. And, although corporate earnings slowed in the first quarter, some analysts expect big gains throughout the year and into 1999.

"The state of the U.S. market right now is the public has a high degree of confidence in their investments," Battipaglia said. "Why would '98 be the year it [the bull market] ends?"

But there is evidence of a cooling economy. Last week, the Federal Reserve left interest rates unchanged because it sees the economy slowing. U.S. manufacturing reported its weakest performance in about two years in June. And construction spending on homes and commercial and government projects fell in May.

Some experts say there are other problems that could drive the market lower.

One red flag, they say, is that gains in the stock market have been driven largely by big company stocks, such as Cisco Systems Inc., Microsoft Corp. and Home Depot Inc.

"We have this flight to safety," Hays said.

"It is fueling our market like there is no tomorrow. That is the first sign of a market that is losing its vitality."

The Russell 2,000 index, a small-company index, for example, was up just 4.66 percent for the year.

While The Sun's Maryland Bloomberg index was up a solid 11.3 percent for the first half of the year, it still lags behind the major indexes, and is far behind last year's 34 percent return.

"Performance is coming from fewer and fewer stocks," said Richard Cripps, the chief market strategist at Baltimore-based Legg Mason Wood Walker Inc. "That is probably trouble for the market if it doesn't stand still and let the broader market catch up with it."

According to Cripps' research, about one-fourth of the companies tracked by the Standard & Poor's 600 stock index, which is made up of small companies, have fallen more than 20 percent from their 52-week highs.

He predicts that the strong economy will keep the market at high levels, but that it could rise or fall as much as 7 percent in the second half of the year.

"I don't look for a big drop in stock or bond prices," he said. "It is just a matter of can it get broader participation. If not, then we would be subject to bouts of correction."

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