Except For a Few Nagging Details, and Some Precedent For a Sharp Correction Despite a Rosy Economy

A year of investor bliss.

Wall Street is roaring; hyper-competitive American companies blitz world markets; jobs are plentiful; a "new era" of investing is here; and although stock prices are very high, low inflation keeps investors upbeat.

Sound familiar?

But hold on.

The year was 1961, and within months of reaching its high, the Dow Jones Industrial Average plunged by 22 percent. Despite the "cheering" economy, "something resembling an earthquake hit the stock market," The New York Times reported after a brutal sell-off on May 28, 1962.

Today, 1962 packs a hard lesson: Amid investor euphoria, even a "Goldilocks" economy can suddenly face a bad-tempered bear.

Bulls have repeatedly trampled bears during the past four years and, with inflation at a whimper, they rumble louder than ever.

But some analysts see forces that might soon throw the Dow into reverse. They offer a watch-list of bull-market bugbears:

Sagging earnings. This poses the most fundamental threat. Wall Street analysts are busy paring back their forecasts for the profits US companies will earn this year. And, generally, profits steer stock prices.

US firms lack "pricing power" because of competition from cheap East Asian products, and dormant inflation, which means they can't raise prices to offset higher labor costs.

Prices for raw materials - down 5 percent in a year - are "clearly signaling slower earnings growth from the double-digit pace" of recent years, says Bruce Steinberg, chief economist at Merrill Lynch in New York.

Meanwhile, wages are swelling at an annual pace of nearly 3 percent, after inflation.

As labor costs rise faster than product prices, "the days of profit-margin expansion are over," says Stephen Roach, economist at Morgan Stanley.

"After-tax corporate profits are headed for a 2 percent drop in 1999," he predicts, "the first down year for earnings in a decade."

Lagging productivity. Don't count on the supposedly new-era economy to sustain stock prices. Productivity has climbed 1.9 percent annually for two years, spurred by new technology and the efficiency induced by expanding foreign trade. But productivity lags behind wage growth and is not on a sustained upswing.

"The so-called productivity resurgence of the past couple of years is really nothing more than a statistical catch-up from the decidedly anemic gains of the preceding three years," Mr. Roach says.

An overvalued market. Federal Reserve Chairman Alan Greenspan is waving a warning flag, although not openly. A Greenspan-endorsed model compares the "earnings yield" on the Standard & Poor's 500 companies (profits divided by share price) with the yield on 10-year Treasury bonds. The formula currently suggests the market is at least 20 percent too high, says Edward Yardeni, chief economist at Deutsche Morgan Grenfell in New York.

Stagnant Japan. Official dithering in Tokyo on economic reform could stir broad financial turmoil. Despite rising foreign pressure, Tokyo has shied away from radical tax cuts and a banking-sector shake-up. The leadership's half-hearted nudges to the world's No. 2 economy could erode investor confidence, with reverberations worldwide.

Euro uncertainty. An unexpectedly rocky launch of the common European currency, the euro, could also jolt global markets. European officials increasingly doubt Italy can qualify for the euro because of its high debt. Market uncertainty will likely rise before a decision May second or third on whether Italy, Belgium, and other borderline countries may join Europe's monetary union.

"Millennial bug." The inability of most computers to properly read dates in the year 2000 could prompt an upheaval for today's "information economy." Even if network crashes are averted, the billions spent in the next two years will sap corporate earnings.

Oil slick. A spike in oil prices could puncture an inflated stock market - fueling inflation, slowing the economy. Mexico, Saudi Arabia, and Venezuela already agreed March 22 to cut oil production in an effort to stem the price decline.

Despite these pitfalls, one other fact about the Dow's 1962 collapse stands out: Within months the market was barreling again, heading for years of hefty profits.

Reasons To Be Squeamish

* High prices. At 24 times next year's earnings, stocks are more expensive than at any time since 1945.

* Short profits. As wages rise faster than consumer prices, profits are getting squeezed.

* Y2K. Fixing the "year 2000" computer glitch will cost corporations big money.

* Over there. Foreign markets could get rattled - by hang-ups with the euro currency or stagnation in Japan.

* Wake-up call. The inflation dog seems asleep, but a surprise jump could raise rates.