Investors Foresee a Bumpy Ride On Stock-Market Roller Coaster

THE United States stock market has once again become a roller-coaster ride for investors, as share prices cascaded up and down this month - both shedding and adding hundreds of millions of dollars in stock portfolios.

But Dennis Lynch, chairman of investment firm Lynch & Mayer Inc. in New York, which has assets of $5.6 billion under management, isn't losing sleep worrying; turbulence is not a stranger to Wall Street, he explains.

Still, he is not completely comfortable with the latest fluctuations, despite an upturn in share prices in recent days. ``I don't think we're out of the woods yet,'' he says. ``The day-to-day performance of the average stock has been [pointing to] conditions other than a bull market.'' In weeks ahead, Mr. Lynch adds, investors can expect a ``choppy'' stock market, based on relatively slow national growth for the US - in the range of 2 percent to 3 percent a year. And that pattern of slower growth and occasionally turbulent days will likely continue into 1995, he says.

Wall Street is also wary. A week ago, major market indexes tumbled on new concerns of rising inflation and a possible tightening of monetary policy by the Federal Reserve Board. Then, in the middle of this week, market indexes rose, following an easing of inflation concerns and a belief that the Fed would not move to a new rate hike until after the November elections, or that, if the Fed did soon tighten, it would do so only modestly.

``The market has already discounted the likely impact of another rate hike by the Fed,'' says Gene Jay Seagle, president of Tactics & Technics, a market-consulting firm in Weston, Conn. ``The market has been anticipating additional increases in interest rates, and the reaction - although it would probably be negative for a few days - would then dissipate,'' Mr. Seagle says.

Still, what is bothering much of Wall Street is a somber reading of underlying market fundamentals in the US. The factors include: weaknesses in the US dollar, which drives away some foreign investors; high price-to-earnings ratios for stocks; dividend yields considered historically low; unusually strong merger and acquisition activity, which shores up market indexes through higher trading volume; and rising commodity prices, which spur inflation.

DAVID SHULMAN, the chief stock strategist for New York investment house Salomon Brothers Inc., says he believes the market environment is similar to the one in 1987; in October of that year, the stock market went into a nose dive, propelling share prices downward in what analysts view as the worst decline since 1929.

While Mr. Shulman does not expect a repeat, he says there could be a ``correction'' in weeks ahead of 10 percent to 12 percent, but that downward momentum would send stocks from their 3,800-point range on the Dow Jones industrial average to the 3,500 range.

Salomon Brothers advocates caution, in part, by selling stocks and raising cash. It is reducing its position in such sectors as utilities, food, and pharmaceuticals.

``The Dow Jones industrial average is currently regrouping,'' says Dennis Jarrett, chief market technician for investment house Kidder, Peabody & Company Inc. in New York. ``And other indexes are now playing catch-up with the Dow. Most indexes could rise during the next few weeks.''

But ``the general thrust of the market is still negative,'' Mr. Jarrett adds. He agrees with Schulman about a correction: ``The likelihood is very great that there will be [one] of 10 percent to 15 percent sometime during the fourth quarter, possibly beginning in late October. If the downturn doesn't start by then, it could spill over into early 1995.''

Not all market technicians expect a major correction, however. ``I expect the market to reach over 4,000 points on the Dow this year,'' Seagle says.

Lynch says he believes that investing in growth stocks, rather than large cyclical companies, is a particularly sound defensive strategy. His firm, he says, has most of its portfolios invested in larger-size growth firms. Bigger companies, he says, are usually more able to withstand daily market gyrations than smaller firms.

Experts note that some market segments have been showing strength, such as export-related firms, automobile manufacturers, and financial-service firms, including many large banks.