Lacking Alternatives, Investors Keep Pumping Up Stock Market

THE stock market is expected to post a modest summer rally following last week's enactment of the Clinton administration's $496 billion deficit-cutting agreement.

Getting the political wheeling and dealing out of the way is considered a plus, financial experts say, since the market prefers certainty. Yet the actual details of the budget agreement were looked upon as a "wash" on Wall Street: While the financial community has welcomed legislative action to help hold down the deficit, there have been grumblings about the negative impact of higher taxes on new investment.

What happened with the budget is "probably not as important to most investors" as the underlying fundamentals of the US economy, says Hildegard Zagorski, at Prudential Securities Inc.

Those fundamentals, Ms. Zagorski says, are essentially positive. "We believe the market will continue in an uptrend," based on "gradual improvement" in the economy, the prospect of higher corporate profits, and continued low interest rates. The market has "largely discounted" the importance of the budget agreement, she says. "We're forecasting that share prices will continue to move upward."

"We've got a positive seasonal pattern under way," says Gene Jay Seagle, a vice president at Gruntal & Co. Mr. Seagle is concerned that higher taxes in the new budget accord will hurt the economy. The market, he says, might dip slightly in the next few weeks, perhaps falling from around 3550 points on the Dow Jones industrial average to about 3500. But even if that were to happen, he expects the stock rally to resume with the Dow climbing to the 3600-point range later this year.

Stocks have moved into lofty terrain. The Dow's all-time high of 3567.70 points was recorded on July 26. The Standard & Poor's 500, which is a broader measure of US firms than the 30-stock Dow, has not advanced as dramatically. The S&P 500 is up only about 3 percent in 1993, compared to 8 percent for the Dow. Many analysts view the market as overvalued.

Based on the previous 12 months, the price-to-earnings ratio for the S&P 500 is a hefty 23, near its 1991 post World War II high. The dividend yield on the S&P 500, meanwhile, is 2.8 percent. The yield has fallen below the current level only three times since 1926, when record keeping began. The yield is roughly where it stood just before the market crash at the start of the Depression.

Still, little gloom seems evident on Wall Street, particularly since investment dollars are pouring into stock mutual funds. For the first six months of 1993, some $60 billion in new monies moved into equity funds, just slightly below the total of $78 billion during all of 1992. "A lot of money" continues to sit on the sidelines, waiting for later this year, Mr. Seagle says.

BECAUSE share prices have been steadily rising, a number of investment houses urge clients to be cautious. Gregory Nie, at Kemper Securities Inc., says investors should "enjoy the party" but "don't indulge." The best approach, he says, is to be "risk-averse."

A rebound of the global economy, aided by a drop in interest rates in Europe, could boost equities in the months ahead. US companies that sell abroad are expected to benefit.

The US economy is still in a recovery, but a weak one. The economy generated 162,000 jobs in July, according to a Labor Department report last Friday. However, most of the growth occurred in lower-paying service jobs.

Factories, which tend to pay better and offer more benefits, continued to cut jobs. However, job growth did lower the nation's unemployment rate to 6.8 percent of the work force from 7 percent in June.

Japan's economy also offers little hope for stimulating US exports in the short run, economists say. Japan has a trade surplus of between $10 billion and $14 billion a month. And Germany's unemployment rate rose to 7.5 percent in July from 7 percent in June.