Stock Analysts Expect Modest Downturn

THE stock market is looking increasingly vulnerable to a modest market downturn - possibly 5 percent to 10 percent - a number of analysts here say. The reason? Investors are bothered by relatively high valuation levels, a slight increase in interest rates, a possible renewal in inflation, political instability in the former Soviet Union, and higher taxes to pay for the Clinton administration's new economic policies.

The current bull market is two and a half years old - a relatively long period for most bull markets since World War II. The market appears to be weary. In recent weeks the number of stocks posting declines has often outnumbered advances; trading volume has been sluggish to low. And interest rates have started to move up slightly.

Last week the yield on 30-year Treasury bonds edged toward 7 percent, up from 6.93 percent. Mortgage rates have also increased slightly.

Stock prices are also considered fairly high. "Companies are now reaching levels where they're just a bit expensive," says Peggy Farley, chief executive officer of AMAS Securities Inc., an investment advisory firm with over $200 million in assets. Ms. Farley says that a price decline "may have already started."

"This is now a very nervous market, and a modest correction of about 5 percent" would not be inconceivable, Farley says. Still, the market will resume its upward course later this spring or summer, she adds, with the Dow Jones industrial average eventually reaching 3,600 points.

On Friday the Dow closed at 3,370.81.

Farley is not alone in her concern about Wall Street skittishness. "At the least, the market has begun to decelerate," says Larry Wachtel, a vice president with Prudential Securities Inc. "Valuations are difficult," he says, meaning that stocks are expensive relative to underlying values. Mr. Wachtel is not yet prepared to assume that a slump is in the works, or, assuming there is a correction, that it will be particularly significant. He stresses that for long-term investors, which includes most America ns who own stocks, the outlook is good for continued market gains, given low interest rates and economic recovery under way in the United States.

Justin Mamis, a market technician with Hancock Institutional Equity Services in New York, does not see the market bottoming out. Some market downs (as well as ups) can be expected during the next month or so, he says. "Bottoming" signals, he says, may not come until mid-April or perhaps May. For investors who like to time stock purchases, that would mean the best moment to buy is still some weeks ahead.

Rao Chalasani, who is chief investment strategist for Kemper Securities Inc., reckons that the market could shed up to 100 points on the Dow during a correction. He sees a range of reasons supporting such a decline, including a slight edging up of inflation, turmoil in Russia, and recent strong market performance by energy stocks, which usually occurs at the end of an economic upturn. Most importantly, he notes that the Dow is substantially outperforming the Standard & Poor's 500, which is a broader inde x of stocks. Yet, a "similar situation" occurred in May and June of 1992, just before a market correction, he says.

Both Farley and Mr. Mamis agree underlying economic and stock-market conditions make it a good time for investors to buy individual stocks based on company fundamentals rather than which sector they belong to. This is a time for "caution" regarding purchases, Farley says.

Small stocks have shown a new burst of energy in the past few days, with a number of technology stocks posting gains. For the quarter ending March 31, however, the Dow, clearly out-performed the Nasdaq index, by 4 percent to 2 percent.

One wild card that could boost the market: In the next few weeks more than $100 billion in one-year certificates of deposit come due. Mutual fund companies and other advisory firms are urging investors to park a substantial percentage of that money in equities.