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World Stock Markets Discover New Highs

TALK about dizzying heights! Global investors have watched a broad range of popular stock market indicators - including the Dow Jones industrial average and the Standard & Poor's 500 in the United States - soar to stratospheric levels in recent months. The market surge reflects the anticipated economic recovery in many industrial nations, as well as continued modest worldwide inflation and low interest rates.

In large part because of a lack of favorable alternative investments - with money market accounts and bank certificates of deposit offering low yields - billions of dollars in investment monies are pouring into equities. But the huge flow of capital into equities and the movement of the stock indexes into unchartered terrain - such as breaking through the 3,600 point barrier on the Dow last month - remind some longtime Wall Street watchers of the stock market in the late summer and early fall of 1987. That year stocks continued to set new records. But then the market plummeted 508 points in one tumultuous day in October, in the worst sell-off since the stock market crash of late 1929.

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Not only is the US market up, but so too are many European and Asian markets. In the last 12 months, the London Financial Times Stock Exchange 100 index shot up 31 percent; the German DAX index rose 24 percent; even the Tokyo Nikkei index rose 16 percent. Last month, the 22 global stock market indexes followed by Morgan Stanley Capital International posted hefty profits.

Spain and Italy outpaced other European markets in investment returns, but market gains were found across the board, including in Germany, Sweden, Norway, France, and Britain. In Asia, stock markets also provided solid gains for investors, led by Singapore, New Zealand, and Malaysia, but including Hong Kong, Australia, and Japan.

Nor is a break in that momentum in sight. ``Our market technicians are expecting the Dow to reach the 3,800 level sometime later this year,'' says Hildegard Zagorski, a market analyst with Prudential Securities. ``As long as interest rates remain low, we expect the market to continue heading higher and higher.''

There could still be a 5 to 10 percent ``correction,'' she says, reflecting the desire of some investors to take profits as well as adjust their stock portfolios for tax purposes before the end of the year. But the US stock market is expected to continue its upward march into next year, Ms. Zagorski says.

``We're not seeing any end to the bull market, although we believe that there could be a correction [in the US market] of 10 percent to 15 percent,'' says Arnold Kaufman, editor of The Outlook, a monthly market review published by Standard & Poor's Corporation.

``Perhaps the big change in the market in recent days is a shift from the perception that the current weaknesses in the economy are good,'' (holding down inflation, keeping interest rates low, and helping stocks), ``to a perception that those same weaknesses will not help corporate profits,'' he says.

The unemployment rate fell to 6.7 percent in August from 6.8 percent in July, the lowest rate since July 1991. But the decline in joblessness was accompanied by a continued erosion in manufacturing jobs, which tend to pay more than service jobs. The index of leading indicators also fell slightly, emphasizing the view of a US economy that is growing only modestly.

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Precisely because of tepid economic growth and high valuation levels in the stock market - with the price-earnings ratio on the S&P 500 now more than 23, near the postwar high recorded in 1991 - a number of market watchers are sending up warnings. James Stack, who publishes IvesTech, a newsletter, is urging caution as the market moves into the fall. Stack is concerned about complacency in the market, as indexes lurch from new highs to new highs.

Since 1977, Mr. Stack notes, the Dow and the S&P 500 have fallen 11 times in the September-October period, compared to four years when the indexes rose. Since 1920, the September-October period is the only two-month period that has averaged ``a net loss'' for the Dow, of around 4.5 percent. And, as Stack notes, the worst market down turns have all occurred in the fall, including severe declines in October of 1929, 1978, 1979, 1987, and 1989.

Still, most market technicians see no evidence of any severe contraction. Nor is there any special concern about this October. One reason: in percentage terms, current market gains are far smaller than increases in prior market run-ups.

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