Stock Market Spirals Higher, but Analysts Wary of Downturn

GRACE MESSNER admits she sometimes goes home ``worried'' these days.

Her concern is legitimate. Ms. Messner is responsible for the management of more than $600 million in investment assets for Wilmington Trust Company, in Wilmington, Del. Most of that money is invested in the stock market, which has been not only hitting all-time highs this year, but showing signs of strain.

The Dow Jones industrial average set a new record Tuesday when it reached 3,697.64 points. Cash continues to pour into stocks, particularly through mutual funds, at a rate of more than $20 billion a month.

At the same time, United States companies have been issuing more new stock than at any time since 1986, the year before the stock market crash of 1987.

What is triggering unease is the high valuation levels, while dividend yields are falling. Both situations have historically been red flags presaging a possible market downturn.

``Right now we are in a case of `good news' being `bad news,''' says Hildegard Zagorski, an analyst with Prudential Securities Inc., an investment house in New York. On Oct. 28, Washington announced that the index of leading indicators rose 0.5 percent in September, slightly higher than the 0.4 percent growth expected. New home sales climbed to their highest level in seven years. Corporate earnings reports continue to come in far stronger than expected.

But higher growth ``is not necessarily good news for the bond market,'' Ms. Zagorski says. In response to prospects of higher growth, interest rates rose slightly and bond prices dropped. Worries in the bond market put downward pressure on stocks, since investors fret that higher bond yields could reduce the value of share prices on equities.

``This is going to be a period'' of day-to-day gyrations in financial markets, Zagorski says, as Wall Street seeks assurance of steady growth, without any increase in inflation. So far, that pattern appears to be holding, she says. Economists for Prudential Securities believe the Dow Jones industrial average will sail to 4,000 points this year, Zagorski says.

Bond yields are still not backing up in such a way as to offer any serious alternative to stocks,'' says Dennis Jarrett, chief market analyst for Kidder, Peabody & Company, an investment house in New York.

There are ``several reasons for concern'' about the course of the market, Mr. Jarrett notes, including the downturn in electric utility stocks. Given their sensitivity to movements in interest rates, electric utility stocks often act as a bellwether in predicting an upcoming market downturn. But Jarrett sees nothing to suggest a price ``correction'' is imminent. In fact, he says a market pullback will likely not occur until the first quarter of 1994 at the earliest. During bear markets in 1987 and 1990, the Dow Jones utility average peaked many months prior to the overall market correction. Is that pattern happening now? While the Dow Jones industrial average has been hitting new highs, the Dow Jones utility average has been hitting four month lows. James Stack, publisher of InvesTech, a stock market newsletter, says the Dow utility average will be signaling trouble if it continues to fall, or fails to take part in rallies on the blue chip industrial average.

In the meantime, Mr. Stack says that, barring any tightening of interest rates by the Federal Reserve Board, the market should continue to gain. But investors, he says, should be cautious and ready to change investing strategies if market conditions suddenly become negative.

Messner says her bank initially screens about 10,000 stocks and then purchases 35 to 40 issues for its portfolio. Messner's screening process is based on risk-aversion: She buys stocks that can appreciate in value, but still weather a downturn.