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Bulls and Bears Clash on Future Of Stock Prices

DRIVEN by the prospect of higher-than-expected corporate earnings, low inflation, and an upturn in the US economy, the stock market appears to have stabilized from its modest correction last month - and perhaps stands in a position to post new gains.

Whether the market actually roars to new highs, however, is in part contingent on the direction of the Japanese stock market and the extent of recovery in the US.

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"We're definitely in a bull market," insists Gene Jay Seagle, a vice president and chief market analyst with Gruntal & Co., an investment house. "We're seeing some corrections in the market, but the corrections are taking place within the confines of a rising market - a bull market." Mr. Seagle, who has been one of the more bullish analysts, reckons that the Dow Jones industrial average will hit the 3,600 point range by the November election.

The high point for the Dow so far this year was 3366.50 points on April 16.

"The economic news out of Washington has been generally positive for the market," says Hildegard Zagorski, a vice president with Prudential Securities Inc. First-quarter economic growth came in at 2 percent, the best since early 1989. The number of initial unemployment insurance claims has been falling. Factory orders in March were up by 1.6 percent over February, the strongest gain in five months. The jump in orders is expected to lead to fewer job hirings than usual.

Ms. Zagorski is not prepared to categorize the current market as a "bull market," because she expects trading to stay within a somewhat "narrow trading range" of between 3,200 points and 3,360 points. "The jury remains out on the economy," she says.

If long-term interest rates were to drop below their current yields of around 8 percent, and there were to be definite signs of economic growth - such as new hirings and a rebound in consumer spending - then the market could be expected to sail upward, Zagorski adds. But until those signs appear the market will likely be marked by the pattern of "ups and downs" that has occurred on most stock indexes in recent weeks, she says.

One challenge facing the US market continues to be the falling Japanese stock market, says Rao Chalasani, chief investment strategist for Kemper Securities Group Inc. in Chicago. So far the decline in Japanese equities has not affected the US market. But Mr. Chalasani believes that if Japan's Nikkei stock index were to fall below 16,000 points, the US market would be directly affected, since some Japanese investors might be forced to sell US holdings in order to meet financial commitments in Japan. The N ikkei index is currently running in the mid-17,000 range.

Chalasani says that he is "modestly cautious" about the US market. Thus, last week he changed Kemper's model portfolio - designed for conservative investors - to provide for greater cash holdings at the expense of stocks. The stock component of the portfolio went from 55 percent equities to 50 percent; the cash holding went from 10 percent to 15 percent; the bond component stayed unchanged at 35 percent.

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The market, says Chalasani, could well break through the 3,400 point level on the Dow soon. But given relatively high price/earnings ratios, that could be "somewhat risky." He is also troubled by declines on NASDAQ's over-the-counter market, which reflects losses for smaller companies. A number of stocks in the biotechnology and computer sectors have been pummeled recently.

Chalasani also says he is fretting about the apparent presidential candidacy of H. Ross Perot, worried that since a strong showing by Mr. Perot could lead to political instability in the US - a factor considered anathema to equities markets. Many overseas investors deliberately buy US equities precisely because they value the two-party political system in the US.

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