Veteran Foresees Stock Plunge, But Market May Be at Fair Price

Philip Carret, who probably has longer stock market experience than any other investment professional, forecast two weeks ago that the Dow Jones industrial average could fall 1,000 points by the end of the year.

"It may even drop further," cautions this market veteran, who founded Pioneer Fund almost 70 years ago. That fund is part of a mutual-fund group with $16 billion under management.

So far, the Dow hasn't plunged nearly that much - a 1,000 point decline would be a 16 percent drop. But the market has become more volatile. The Dow dipped more than 100 points on Wednesday and last Friday before closing down more modestly.

Arnold Moskowitz, an investment adviser in Palm Beach, Fla., sees these small price dips as just "random fluctuations ... noise" in the market. They probably reflect the tendency of managers of mutual funds and other financial institutions to window-dress their financial statements by "selling out the dogs" in their portfolios before the end of the year, he says. Also, many individuals want to nail down capital gains on stocks by selling them before year-end.

After market blips, analysts and the media often blame them on factors such as, say, Federal Reserve chairman Alan Greenspan's speech recalling the plunge in Japan's stock prices in 1989 and 1990, or a jump in producer prices. "It is usually made up," Mr. Moskowitz says.

Moskowitz does anticipate more modest market "corrections" of 3 to 5 percent in stock prices. But he is basically bullish, predicting the Dow will go to 7300 before the end of 1997 and 16,000 by 2005.

Mr. Carret, in an interview released by Pioneer Fund Distributors, says investors should not be concerned with such short-term corrections as a 1,000-point drop, but be in the market "for the long haul." He has for decades advocated investing for "value" - buying stocks at good prices and generally holding them. At this moment, he says the Dow "has gotten ahead of itself."

At any time, views on stock prices are by necessity diverse. If every investor was pessimistic, no one could sell a stock at any price. Pure sentiment can drive stock prices in one direction, as can a change say in such basics as interest rates or economic policy. But analysts such as Carret and Moskowitz look at fundamentals behind prices.

Moskowitz bases his optimism on such assumptions as these: (1) Moderate growth in the economy sustaining an increase in corporate earnings of 8 percent this year and 8 to 10 percent in 1997; (2) inflation remaining modest, about 3 percent a year; (3) the bond market stabilizing, with interest rates on long-term bonds (now about 6.5 percent) perhaps dropping to the 6 percent level; and (4) the United States dollar remaining reasonably strong against the Japanese yen and European currencies, thereby encouraging an inflow of money from abroad into US stocks.

Further, Moskowitz expects the flow of money into stock mutual funds to continue at this year's $16 billion to $18 billion monthly rate. Inflows may even rise in the new year, with annual contributions by employers into pension funds and by individuals into individual retirement accounts by April. Another boost to stock prices, he says, is coming from companies buying up their own stocks - $100 billion this year, perhaps more in 1997. An additional demand for stocks has come from corporate mergers and acquisitions - $450 billion in 1995, an estimated $525 billion this year - and a flood of initial public offerings of stock.

David Wyss, an economist at DRI/McGraw-Hill in Lexington, Mass., figures stock prices will move "basically sideways" in 1997, with the possibility of a short-term "correction" at some point. But predicting market dips is almost impossible. "If I could, I would be sitting on the beach in Miami and calling in my [stock] orders," Mr. Wyss says.

Noting that the Standard & Poor's 500 stock index has gained 64 percent in two years, Wyss and colleague Roger Brinner write of "an instinctive reaction" that the market must surely be overpriced. But they calculate that the price-earnings ratio of the Standard & Poor's 500 stock index - 20 at present - is 5 percent below an appropriate 21 P-E ratio, considering the present yield on US Treasury bonds of about 6.5 percent.

The calculation assumes that investors make choices between buying risky stocks and safer government bonds depending on the gap in yields between the two.

But the two consulting economists say earnings growth for the S&P 500 has slipped from 11 percent in 1995 to 9.8 percent in 1996 and will drift lower in 1997. This could disappoint "spoiled investors," they warn.

As for Mr. Greenspan's analogy to Japan, it is "way off," Moskowitz says. That 60 percent stock crash followed a severe credit-crunch policy that raised interest rates in Japan from 3 percent to 8.25 percent.