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Stock Market Surge Will Likely Pull Back This Fall, Analysts Say

THE stock market has been on an upward roll. It has been fueled by a slowing economy that should provide growth without risk of additional inflation, solid corporate profits, hefty investment by the public in stock mutual funds, and a perception by investors that the Federal Reserve may not announce another hike in interest rates until at least after the November congressional elections.

The question now is whether the pell-mell rising market will soon abate or continue through September. Historically, September has not been a strong month for stocks. Based on the breadth of the recent market rally, the consensus on Wall Street is that while additional market gains can be anticipated early this fall, a retrenchment also seems likely.

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``So far, the market expansion has been like the Energizer rabbit,'' says Dennis Jarrett, who heads up technical research for New York investment company Kidder, Peabody & Co. ``It just keeps going and going and going.''

Since late June, the market, as measured by the Dow Jones industrial average, has shot up 7 percent, Mr. Jarrett says. ``The Nasdaq [over-the-counter] market has done even better - it's shot up over 10 percent.'' Even if the market were to show downward momentum, as it did in trading Tuesday, ``I expect the Dow to reach a new all-time high'' sometime in September, Jarrett says.

Still, he says he expects a ``pullback'' [correction] of between 10 percent and 15 percent in October or November. Following that downturn, there will be a resumption in the upward climb of the market, Jarrett reckons.

``Whatever you call this, a `summer rally,' a `late-summer rally,' or the beginning of a `fall rally,' the market has been showing a strong surge,'' says Larry Wachtel, a vice president at Prudential Securities Inc., a New York investment house. ``There's no single reason. There's been a huge inflow of money into stock mutual funds; corporate profits have been strong; mergers are back, including the merger of [defense contractors] Lockheed [Corporation] and Martin Marietta [Corporation] this week; and there's a sense here that the Fed is no longer `in our face,' and that there just may not be any additional hikes in interest rates between now and the election.''

While the market should post advances in September, a correction cannot be ruled out during the next few months, Mr. Wachtel says. Since hitting a high of 3978.36 points on the Dow on Jan. 31, the market wobbled up and down during much of the year - although it mainly headed south. But since the end of June, the market has been recouping its losses.

Last week, the market soared upward for five straight days - its best one-week rise since Feb. 5, 1993, shortly after the Clinton administration took office. Politics was a factor last week, Jarrett says, with investors apparently welcoming action on the crime bill, which finally cleared Congress. But, he notes, many investors may also have welcomed congressional ``inaction'' on health-care reform, since it could have an unsettling impact on health-sector companies. ``We've had a very nice upward move in the third quarter,'' says Gregory Nie of Kemper Securities Inc., an investment company in Chicago. ``But the market is getting into overbought territory'' - a situation that occurs when investors buy stocks just for the sake of climbing into a rising market.

Mr. Nie says investors should be cautious. While most market analysts are talking about a correction in late September or October, it could actually come much earlier, even during the next week or so. ``We may be very close to it,'' given the sharp increases in share prices lately, Nie says.