Stock Watchers Like The Looks of 1994

SPURRED by low interest rates, higher consumer confidence, rising demand for manufactured goods abroad, and strong economic growth in the Sunbelt, farmbelt, and the upper Midwest, the United States stock market looks set to continue its advance well into 1994.

``We expect the Dow [Jones industrial average] to hit the 4,100 point range, although whether it stays there is more questionable,'' says Rao Chalasani, chief investment strategist with Kemper Securities Inc. in Chicago. It is now around 3,800 points. There are many ``positive factors'' about the US economy helping to drive the market, Mr. Chalasani notes, including higher home sales.

The economic news could not have been much better than it was for the stock market last week:

* Durable good orders were up in November, for the fourth straight month.

* Holiday shopping revenues were up throughout the US.

* Automakers reported gains in car sales.

Major indexes did dip slightly Friday in light trading, reflecting year-end portfolio adjustments. Yet analysts expect the year-end economic rally to carry over into this year.

``We expect 1994 to be a much stronger year than 1993,'' says David Wyss, an economist with DRI/McGraw-Hill, an economics consulting firm in Lexington, Mass. US economic growth ``should reach a tad over 3 percent in 1994, a little stronger'' than the growth rate of about 2.8 percent for 1993, Mr. Wyss says.

The strongest regions of the US, in terms of economic performance, will be the Sunbelt states, given increasing diversification away from the oil sector, northern-tier states such as Wisconsin, Minnesota, and the Dakotas (again, because of diversification), and farmbelt states, thanks to what looks like a good year for agriculture.The Pacific Northwest is slowing, he says, partly because of production cutbacks in aerospace; the upper Atlantic coast states will grow only slowly; and California continues to look weak, in part because of job cuts in defense.

But the bottom line, Wyss says, is that a number of economic sectors look promising as the new year starts, including export-related firms, (especially in capital goods manufacturing, industrial supplies, and services); housing and household-furnishings related companies; some electronics firms; and big ticket items such as automobiles.

Manufacturing is expected to do very well in some regions, including North Carolina, which is now the No. 1 state in the US in terms of the percentage of the labor force involved in actual production. Wyss predicts that exports to Mexico will rise in 1994 because of the North America Free Trade Agreement.

``Anything related to household formation, such as home furnishings and furniture, should do well,'' Mr. Chalasani says. But exports may not do overly well, he says, given the slow rate of recovery in many industrial nations.

A strong economy, of course, means cash flow for corporate America. Fundamentals are in place for positive corporate earnings results for many US corporations this year, according to analysis by Richard Rippe, chief economist for Prudential Securities Inc. Operating profits for US corporations could rise as much as 18 percent in 1994, he says, up from around 12 percent in 1993.

Strategists for most major investment houses are saying essentially the same thing, although some analysts worry about high valuation levels within the stock market. But the two main US market indexes - the Dow and the Standard & Poor's 500 - both ended 1993 by moving to new records. Last week, for example, the Dow jumped into the 3,790-point level, beating its prior record set in early December; the S&P 500, meanwhile, rose to the 470 point level, topping its mid-October record.

Still, veteran stock analysts caution that a correction of around 10 percent cannot be ruled out, since this particular bull market has gone on for so long; the S&P 500, for example, has not had a correction of at least 10 percent in more than three years.