Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Fri, Apr 17 1992 Date: Fri, 17 Apr 92 05:42:11 EDT Message-ID: 04-17 0000 BONUS: All eyes are on market's rally USA TODAY Update April 17-19, 1992 Source: USA TODAY:Gannett National Information Network For stock investors, good news sometimes comes in clumps. The past week, the Japanese stock market stabilized. The Federal Reserve eased interest rates. Then, companies started announcing surprisingly strong quarterly earnings. The result: emboldened investors pushed blue-chip stocks out of the tight range they've been trading in since mid-January. The benchmark Dow Jones industrial average has rocketed 185 points to 3367 the past six trading days, a 6% rise. HOW MUCH LONGER CAN THIS LAST? "Investors have breathed one big sigh of relief," says Jim Solloway, market strategist at Argus Research. No one knows just how long the good vibes will last. By several measures, the stock market is getting pricey. The strength of the economic recovery is still unclear. And small-company stocks may be in for bad times. Thursday, they took a beating. The NASDAQ over-the-counter index sank 8.22 points, or 1.4%, to 591.81. WHAT WAS THE DOW DOING BEFORE THIS LATEST RALLY? Until the market's latest rally, the Dow had been stuck in a two-month funk. It bounced between 3200 and 3290 like a tennis ball being volleyed from the baselines. Investors essentially were waiting for a reason to push stocks higher. They already had restructured their holdings. WHAT WERE INVESTORS BUYING AND SELLING DURING THIS TIME? They had sold defensive stocks, ones that tend to do well despite a sour economy, and bought stocks of companies whose earnings move up and down with the economy. Last Thursday, the Fed provided a spark. It took steps to ease the federal funds rate to 3.75% from 4%. Convinced that would help the economy, investors moved to buy stocks. DID ANYTHING ELSE GIVE STOCKS A LIFT? Added fuel came when companies started releasing better-than-expected earnings. The rally is strong, analysts say, because it affects so many stocks, large and small, and because trading volume is high, meaning it's being powered by more than a few traders. But there still are many things for investors to worry about. WHAT SHOULD INVESTORS FEAR? The biggest problem is that stocks are expensive. The S&P 500 index is trading at 26 times last year's earnings. Analysts say the market is fairly valued at about 16 or 17 times the previous year's earnings. "Whenever you get (a P-E) in excess of 25, historically, that says to watch out," says Stephen Leeb, editor of Personal Finance newsletter. "There is no case of a major advance in the market with valuations as high as they are today." WHAT DO MARKET BULLS SAY? Bullish Wall Streeters say the market trades on expectations and point to expected '92 earnings. Still, the S&P 500 is trading above 18 times expected earnings for this year, according to Institutional Brokers Estimate Service. That's pretty high. If earnings gains this year and next are really strong, though, stocks could have room to rise. Jack Shaughnessy, research director at Advest Group, says the last time stocks soared mostly because of rising earnings - vs. rallies based on falling rates or takeover speculation, for example - was 1985 through 1986. WHAT HAPPENED DURING THAT PERIOD? The Dow soared almost 60% those two years - from 1200 to 1900. Earnings at the typical big company jumped 50% in the same period. Of course, earnings this year could be disappointing despite the pleasant surprises of the past few days. Indeed, analysts' average estimate for this year is 42% higher than earnings last year - a projected jump that some market followers scoff at. BUT WHAT ABOUT THE RECENT GOOD NEWS? As far as this week's good earnings news: "You tend to get the best reports early in the reporting period," says Eric Miller, strategist at Donaldson Lufkin Jenrette. Bullish investors "are indeed putting a lot of faith in earnings," says Rao Chalasani, chief investment strategist at Kemper Securities. "If they don't come in (that strong), you're looking at trouble." COULD ANALYSTS REALLY BE THAT FAR OFF ABOUT THIS YEAR'S EARNINGS? In a word: Yes. Consider last year's earnings. For the S&P 500, they came in at $15.98. But last April, analysts were predicting $22.19 - 39% too high. In any case, earnings probably will be the focus of investors for now. Though the Fed since December has twice sparked rallies by pushing rates lower, economists say long- and short-term rate movements will matter less. WILL RATES PLAY ANY ROLE IN THE MARKET'S NEXT MOVEMENTS? Interest rates still matter. But analysts doubt that investors will be frightened if yields on long-term Treasury bonds inch back over 8%. Thursday, bond investors bid yields up slightly to 7.93% from 7.87% Wednesday. Also, the Fed seems committed to keeping short-term rates - it wields big influence over the discount and federal funds rates - low enough to keep the economy moving. WHAT IF THE ECONOMY SPUTTERS? Of course, if the recovery proves to be a false start and earnings wash out, the market will lose ground. "But right now, the economy seems to have the necessary underpinnings to keep the market going," says David Bostian, economist and strategist at Herzog Heine Geduld. Analysts see another problem in the weak performance of small-company stocks. WHAT'S THE PROBLEM WITH SMALL COMPANY STOCKS? While the Dow is at an all-time high - having set records Tuesday, Wednesday and Thursday - small stocks are still well below their highs. The NASDAQ over-the-counter composite index is 8% off its record, 644.92, set in February. WHAT STOCKS ARE INVESTORS BUYING NOW? Shaughnessy says investors now are infatuated with basic-industry companies that did poorly in last year's recession. The desire to chase highflying small-company stocks is fading. The recent rally was led by large stocks sensitive to the economy. Among the winners: IBM and ALCOA, both of which turned in better-than-expected earnings. "People seem much more optimistic about the future earnings of big cyclical companies," Shaughnessy says. DOES FALLING SMALL STOCKS AND RISING BIG STOCKS POSE A PROBLEM? The strain between large stocks and small stocks scares some analysts. Historically, when the Dow gets out of whack with broader averages, it usually means the Dow's about to get whipped back into line. Others note that individual investors have been active buyers, especially through mutual funds, and that the stream of stock offerings this year has yet to slow significantly - classic signs that the market is topping out. WHAT'S AHEAD FOR THE MARKET? Goldman says the market is due for a correction. "The Dow will pull back 75 to 100 points," he predicts. But few are expecting the beginning of a growling bear market. Investors most likely need some time to take in the current market action. Says Solloway: "If the recovery continues and earnings keep climbing, investors will drive stocks higher." Bonus Editor: William Snoddy. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM