Will Stock Market's `Summer Rally' Occur in the Fall?

THE long-awaited ``summer rally'' on United States stock exchanges may be just around the corner - in the fall.

For weeks now, investment houses have been watching the economic horizon for signs of a summer market rally. In the past, summer months have been relatively upbeat, as many investors go on vacation, companies defer expansion plans until fall, and stock-trading patterns settle into a balmy glow. Unfortunately, that may not happen in the summer of 1994, according to some analysts.

``Up until just a few weeks ago, it looked like a summer rally was possible. But now we are not so sure,'' says Hildegard Zagorski, an analyst with investment house Prudential Securities Inc. in New York. Higher interest rates, the decline in the value of the dollar relative to the Japanese yen, rising commodity prices, and the possibility of another round of rate hikes by the Federal Reserve have taken much of the zip out of any imminent upswing in stock prices, she explains.

``The summer looks rocky,'' Ms. Zagorski adds. In contrast, the fall months look more promising, since many of the more disconcerting financial issues - such as the falling dollar - ``should be resolved.''

All eyes here continue to be focused on the Federal Reserve, Zagorski says; additional rate hikes could come at any time during the months ahead.

Moreover, even if stock values shoot upward this summer, some roller-coaster dips can be expected, reflecting the uncertain economic climate, she says.

In one study, Salomon Brothers, an investment firm, maintains that the market will likely ``remain somewhat boring,'' but tilted toward the upside. Investment house Lord, Abbett & Company states that the market will not be vulnerable to more than ``interim corrections,'' so long as ``interest rates do not rise much above present levels.''

But will rates not rise much? Dennis Jarrett, chief market technician for Kidder, Peabody & Co. in New York says he believes that the yield on the 30-year bond could reach 7.75 percent before peaking. That's not good news for stocks, since higher rates make stocks less attractive compared with alternative investments. The long bond is currently in the 7.5 range.

Although Mr. Jarrett says the current ``bull market'' should remain intact over the next several years, he adds that another correction could take the Dow Jones industrial average down to between 3,200 and 3,400 points.

The Dow is now in the 3,600-point range. Since hitting a high of 3,978.36 points on Jan. 31, it has zigzagged, moving slightly below the 3,600-point range in late March. But since lifting above 3,800 points in early June, the market has once again wobbled downward.

Stocks of small companies have been particularly hard hit, with the Russell 2000 index, which measures smaller companies, falling to a new low recently. So far this year, the Dow is down only around 8 percent from its Jan. 31 high; the Standard & Poor's 500 is down about 9 percent.

James Stack, a market analyst who publishes InvesTech newsletter, says he is wary. Mr. Stack says the ``summer rally'' is a figment of ``Wall Street's imagination.''

He says he finds little statistical evidence to support the notion that stocks do better in summer than in other seasons, although he does say there is a basis for a November-December ``Santa Claus rally'' - when stock prices climb during the holiday period.

AS recently as late May, Stack's economic models were signaling evidence of a ``bear market'' - a period of declining market values. In a recent report, he urged his clients not to be lulled by news about the robust American economy. His conclusion: During bear markets going back to 1962, the economy ``continued to improve'' in at least the first half of these markets. Still, those who see a bull market in place this summer point to high consumer confidence, vigorous US economic growth, and attractive corporate profits.

There also has not been any net withdrawal of assets from stock mutual funds, despite losses by many funds. During the second quarter of this year, a majority of mutual funds, including stock funds, lost money. Billions of dollars have been yanked from bond funds, but the continuing popularity of equity funds suggests that both small investors and institutional investors continue to see a healthy stock market ahead.