Stocks Set To Go Even Higher?

BUOYED by a still-expanding economy and no sign of either immediate recession or out-of-control inflation, the United States stock market - as measured by such popular indexes as the Standard & Poor's 500 and the Dow Jones industrial average - continues to set new records. And barring any unexpected economic adversity, the consensus is that the market will continue to post gains, at least for the next several months. ``What the market is now saying is that economic growth is good, so long as that growth is not inflationary,'' says Raymond Worseck, chief economist with A.G. Edwards & Sons Inc. in St. Louis. The market, says Mr. Worseck, is reflecting the steady pace of the underlying economy. Case in point: The Commerce Department reported earlier this week that the US gross national product (GNP) - the output of goods and services within the US - grew at a 2.7 percent in the second quarter. That growth figure was an upward revision from the 1.7 percent rate originally reported during July. A measurement of priceslinked to the GNP did not indicate any substantial resurgence of inflation, economists note.

``Commodity prices are not doing anything to be worried about and there are no unusual labor pressures,'' says Worseck. ``The stock market itself it not overvalued. International markets remain strong. So for now, the market should continue to grow, so long as there are no surprises, such as anti-LBO'' (leveraged buyout) ``legislation enacted by Congress. Indeed, all the surprises this year have repeatedly favored the bulls.''

``Interest rates are not up all that badly, the economy is still sputtering along, and corporate earnings are looking good. So why shouldn't the market be up?'' asks Perrin H. Long, Jr., an analyst with Lipper Analytical Securities Corporation.

The stock market, he says, has its ``own'' sense of ``appraisal,'' as opposed to merely looking at current economic conditions. The investment community, says Mr. Long, ``tends to look six months down the road. If the stock market were heading south'' (i.e., turning downward) ``lots of people would be saying that the economy is slowing down.''

The Dow broke through to a new record on Thursday, Aug. 24, closing at 2,734.64. That high broke the previous all-time market high of 2,722.42, set almost to the day two years earlier, on Aug. 25, 1987. That prior high, of course, was followed by the market crash of Oct. 19, 1987, when the market shed 508 points, closing at 1,738.74.

The fundamental direction for the market has been upward since the crash. Most market indexes, such as the S&P 500, had already broken their previous 1987 highs in July, well before the Dow Jones industrial average got around to doing so this month. According to financial analysts, US markets have repeatedly lagged behind many of their overseas counterparts in posting new highs. In London, the Financial Times Stock Exchange 30-share index posted a new high Aug. 4. In Japan, a new high was posted in April 1988.

Easing (or, at least, not expanding) interest rates, continued interest in takeovers and mergers, as well as the generally stable global political setting, with the Soviet-US rivalry finally showing signs of waning, are all helping to provide momentum for the market. Stocks currently riding high, says Worseck, include basic industries, consumer cyclicals, and energy and science companies. ``This is a complete reversal of a month or so back, when the main action was in defensive stocks'' - issues that one might might buy during or at the outset of a recession.

Worseck cautions that some ``pressures will soon come into play for the market,'' including rising concerns from investors that Congress might enact legislation limiting leveraged buyouts.

Indeed, some analysts are pessimistic about the rising market.

``Looked at in the short-term, the market has the technical strength for some assaults on new highs,'' says James Stack, editor of InvesTech, an investor newsletter. Mr. Stack believes there is an ``increasing probability of a sharp correction'' in the market. The reason? Stack believes that institutional portfolio managers, in their eagerness to scramble aboard a rising Dow, are missing the underlying danger signals in the economy, including this week's higher growth figure. The higher GNP figure, he suggests, shows that the Federal Reserve Board did not achieve its desired ``soft landing'' (slowdown) for the economy.

Instead, he says, there has been a ``fly by'' for the economy, with underlying inflationary pressures remaining high. The upshot, Stack says, is that interest rates could rise higher later this year, following new belt-tightening by the Fed. And while the market, he says, may ``flounder'' in the 2,700 range during the weeks ahead, there is a growing likelihood that it will he heading downward later this year or early in 1990.