Optimism reigns for the 1999 market

A year ago, Wall Street economist Arnold Moskowitz predicted the stock market would take a major tumble. Then it would recover, with prices up 20 percent for the year.

So far, he looks like a genius.

Optimists like Mr. Moskowitz are again ascendent among stock-market analysts.

There are some pessimists, though. Robert Parks, another Wall Street economist, calls United States stock prices "a megabubble."

Interest rate cuts by 11 European nations earlier this month, he says, "come too late to offset the global overinvestment-overcapacity-overleveraging bust, and spreading deflation."

But Moskowitz says the Dow Jones Industrial Average will hit 10000 in the spring quarter. That would be a gain of about 11 percent from its present level.

In between, there might be a "modest correction" of 3 to 7 percent, he adds.

Between Sept. 30, 1993 and Sept. 30, 1998, stocks prices have earned a compound annual return of about 20 percent - a bit more with the recent rise in prices.

Such gains aren't all that rare. Since 1926, there have been seven five-year periods that have produced equal results or better.

Nonetheless, such returns are "certainly not the norm," notes Tony Vento, an analyst at Edward Jones, a brokerage firm based in St. Louis.

Even more unusual is the ratio of stock prices to their earnings, often considered a good measure of the riskiness of stocks.

As of last week, the total price of stocks in the Standard & Poor's 500 Index was 27 times their earnings over the past 12 months, reckons Alan Skrainka, chief market strategist for Edward Jones.

Moskowitz predicts that ratio will change slightly to 26 for 1999.

"Wow! Amazing!" any analyst would have said a few years ago. "That's far above normal."

But Mr. Skrainka and Moskowitz can offer explanations for today's high stock prices:

1. Inflation is extremely low.

"That means the Federal Reserve will be in a holding pattern, or, more likely, it will cut interest rates further to stabilize the US economy, and, in a broader sense, the world economy," says Moskowitz.

2. Interest rates are falling.

That makes bonds and other fixed-interest investments less competitive with stocks.

Moskowitz expects the Fed will trim short-term interest rates by half a percentage point in the next few weeks. He predicts that by the end of 1999, short-term rates will drop as low as 4 percent.

The interest rate for long-term bonds, he adds, should dip to 3.5 percent, well below today's nearly 5 percent.

Fifty-five central banks have cut their interest rates since Oct. 1, notes Skrainka.

3. Corporate earnings should improve.

Skrainka sees an economic pickup later in 1999. Seeing that, investors could push up the S&P 500 Index 7 percent next year, he says.

Moskowitz expects the average earnings per share of those 500 stocks to rise to $53 or $54 next year, up from $49.50 this year.

4. Corporate mergers are booming.

"It's a positive factor for the market," says Moskowitz. They boost the stock price of acquired companies. And some mergers take stocks off the market, reducing their supply.

Another prop for the market is stock purchases by foreigners, says David Hale, an economist with Scudder Kemper Investments Inc., in Chicago. They're expected to buy some $88 billion in stocks this year, partly financing the growing trade deficit.

Not impressed by such factors, Mr. Parks remains "an unrepentant bear" on the market.

He talks of "institutional madness," with mutual funds, pensions funds, etc., driving stock prices to bubble levels, and retail day traders chasing "butterfly stocks," such as those of Internet companies - beautiful but short-lived.

Two views, two choices for investors.