THE United States stock market roared to dizzying new highs last week, buoyed by the expectation of continued American economic growth, low inflation, positive corporate profits, and a "stimulus package" from Washington to create new jobs.
The question now being asked on Wall Street is how far this current bull market can travel before plummeting back to earth. Some market analysts expect a modest correction during the next few months.
Last week the Dow Jones industrial average finally did what most other major stock indexes in the US have done so far in 1993: reached a new high. While such indexes as the Standard & Poor's 500 and the Nasdaq stock composite had already set records, the Dow - which measures many of the most prestigious blue-chip stocks in the US - had been a laggard.
No longer. On Thursday, the Dow blasted through its prior high of 3,413.21, established on June 1, 1992, by climbing to 3,416.74. On Friday, the Dow was up another 25.40. The Dow closed at 3,442.14, a gain of 132 points for the week. That was the third best weekly point gain in history.
"Yes, it's getting frothy [in the stock market]; but there's absolutely no evidence yet that says this [bull market] will stop," says Larry Wachtel, a vice president with Prudential Securities Inc.
In terms of underlying fundamentals, economic conditions are just about exactly right for Wall Street, says Mr. Wachtel. "The economy is improving at a moderate pace; there is ample labor capacity, which means that there are no inflationary pressures; and interest rates remain low."
"Should investors be cautious," asks Wachtel. "Probably." But with interest rates remaining low, he says, investors find "that there's really no place to go but into stocks." Within the equities market itself, there is now "constant rotation" of various stock groups, with no one sector - such as manufacturing or consumer companies - so dominating the market that a downturn in that one group's performance would tend to pull down the entire stock market.
"The market is becoming dizzying right now, and that's definitely something to watch," says Rao Chalasani, a market strategist with Kemper Securities Group Inc. "Many of the stocks that were shining so brightly in December and January are not shining today. So we're at a level where market gains are going to be harder to come by."
A market correction "is now something that one should be watching for," says Mr. Chalasani. "Fortunately," he argues, since the market has "advanced so slowly" - that is, the market of major US corporations measured by the Dow and the S&P 500 - any downturn would probably be "minor, perhaps on the order of a decline of 5 percent or so."
NEW interest rate cuts by the German and Japanese governments are expected to help keep stocks on an upward course during 1993 as a whole, despite a possible brief correction in the US market, experts note.
Lower interest rates abroad would make it easier for the Federal Reserve Board to make slight rate cuts in the US if necessary to stimulate the economy.
So far this year, the market has largely been driven by a boom in smaller companies. The Dow and the S&P 500 have each climbed about 4 percent in 1993. But the Nasdaq composite index, which monitors smaller companies and many high-tech firms, has shot up 25 percent since last October.
The Dow has been pulled down by the problems of a number of its best-known stocks, including IBM and General Motors. One reason why investors are suddenly turning back to blue-chip stocks - which is what is kicking the Dow into new highs - is that there is a perception that the steam is going out of many smaller stocks, says Chalasani.
James Stack, who publishes InvesTech, an investment review, argues that yellow "warning lights" are now flashing within the market. All indicators still point to a continuing bull market, he says. But Mr. Stack says that he may be advising his clients to shift more of their assets into cash - and out of equities - by spring, if conditions warrant. Reasons for caution, he says, include the euphoria now surrounding the stock market, and the lackluster performance of utility stocks, which usually tend to sh are the lead in a bull market, but have not done so this time.
Stack is also concerned that the Federal Reserve Board may not be adequately expanding the nation's money supply. Growth in some measures of money, he says, usually goes hand-in-hand with bull markets that last over time.