Investors have done well, but the market is walking on air

THE best is yet to come,'' says stock market letter writer Howard Ruff of share prices. Nonsense, argues John Wright, an investment manager of $4 billion. ``There is greater vulnerability for a decline in the stock market now than at any time since 1929.''

Mr. Wright was around in 1928-29 and recalls the euphoria among market investors at that time. He also remembers many well-to-do friends with chauffeurs who were living in their chauffeur's quarters by 1932.

The president of Wright Investors' Service isn't predicting another Great Depression. He believes the Federal Reserve System learned something from its mistakes in the 1930s, when it let interest rates rise and the money supply shrink. Should there be a ``substantial correction'' in stock prices in the next few months, as he predicts, he figures the Fed will lower interest rates by pushing new money out faster. That Fed action should prevent a bad economic slump.

Wright, who has been in the money management game for 30 years, forecast a market collapse earlier this year. So far, of course, he has been wrong. The stock market price indices reached new highs only last Tuesday before prices retreated somewhat in subsequent days.

As Wright admits, predicting a bull market peak is not easy. ``I never thought the market would go to such extremes,'' he says.

Two trends upset his forecast, he says. First, corporate takeovers removed a sizeable chunk of the supply of stocks from the market and put hot cash in the hands of many investors. One variety of takeover, leveraged buyouts, alone took more than $20 billion of shares out of the market last year. Second, foreign investors, particularly the Japanese, poured billions into the American market. Mr. Ruff's optimism for the market is based partially on that Japanese money. Typical Japanese stocks, he notes, sell for 60 or 70 times earnings. This makes American stocks look cheap to them. ``The inevitable crash of the Japanese stock market will probably stampede billions more dollars into the US market,'' he holds.

H. Erich Heinemann, a market bear and an economist for Moseley Securities Corporation, says the notion that foreigners will be around to bail American investors out of their speculative excesses ``will surely be a costly illusion.''

The statistics are flashing warning signs to investors. The Dow Jones industrial average at 2,700, which the market exceeded for a while last week, is priced at 266 percent of the book value of the 30 stocks making up that index. This is the highest level since 1929.

Despite strong corporate profits this year, the ratio of share prices to earnings for the Standard and Poor 500 companies is running in the 18 to 20 percent range, calculates Wright. That P/E ratio last peaked at about 19 in 1968, just before prices started a decline that lasted several years.

It would take five years of good earnings growth to justify current stock prices, holds Wright.

Over the past five years, the Dow Jones industrial average has averaged a 28 percent compound annual rate of price appreciation. This move has been bettered only two times in this century.

So investors have done well. But the market is now walking on air. Speculators could shove prices higher for a while. Realism could upset their game.