In Zooming Market, Moderate Course May Be Best

Stock prices have gone so high that satirists have moved in. James Grant, who writes a market newsletter, has put out a mutual-fund prospectus for the imaginary "Grant's Extreme Growth Fund," making fun of the bullish view.

A majority of analysts, though, predict that the price run has a way to go - perhaps into 1998.

The blaze of record-setting by market indexes in recent weeks has left experts - let alone small investors - in a quandary.

Peggy Farley is an optimist. Barring the unexpected, the Dow Jones industrial average is still on course to hit 7000, perhaps during the first half of 1997, says the managing director of investment house AMAS Securities Inc. The Dow passed the 6500 mark Monday. Momentum from US investors continues to push the market up, she says. And more overseas money is flowing into Wall Street.

But hang on, because the market ride, she reckons, "is going to be a little rocky," including possibly even a mini "correction" or downturn.

In contrast, Mr. Grant is suspicious that the market highs reflect too much speculation and an overvaluation of stocks compared with company earnings. Mimicking the language of a real prospectus, his phony document declares: "There can be no assurance that the Fund will achieve its investment objective, which depends on the continued, and unprecedented, outpouring of public money into equity mutual funds."

That is just what investors have been doing so far this year. The Investment Company Institute, a Washington trade group for mutual funds, says stock funds took in $13.5 billion in October, down a bit from the $17.4 billion in September. And by some reports, inflows may have stepped up in November. By now, investors have put a record $200 billion in stock mutual funds in 1996.

"I don't see anything out there yet stopping" the market's rise, says Richard Janus, a manager at Society Asset Management Inc. in Cleveland.

"What's driving the stock market now are the same factors" that have driven it upward for five years now, namely "expectations of decent corporate earnings, a stable interest-rate environment, and continued cash flows into mutual funds," says Larry Wachtel, a vice president of Prudential Securities Inc.

But Prudential market technician Ralph Acampora, who sent shock waves through the corridors of Wall Street back in June 1995 by predicting the Dow would hit 7000 points by 1998, reckons that the rising tide "will not lift all boats."

If the the market's momentum does slow, it would not be unwelcome at many investment houses.

"What we've been seeing is blue-chip mania," Mr. Wachtel says, as investors - including large institutional pension funds and mutual-fund groups - have been scooping up prominent large-company stocks. About 20 percent of the gain in the Dow for November has come from IBM alone, he notes.

Smaller stocks have lagged behind blue-chips.

In this two-tier market, Wachtel says a "hidden correction" has been occurring among many stocks.

Bearish sentiment is growing fervid in some quarters. Elaine Garzarelli, in this week's edition of her closely watched newsletter, stamped the envelope, "SELL NOW, The Next Bear Market Is At Hand."

Michael Flament, an economist at Wright Investors' Service in Bridgeport, Conn., says investors can expect "more pedestrian returns" on stocks in the next couple of years. The ratio of stock prices to expected earnings in 1997 for the Standard & Poor's 500 stock index is now 18.3. That's a high P-E ratio, he says, considering the long-term relationship of stock prices to interest rates on bonds. He sees "a good chance" of a market slump "at some point."

Over time, the stock market can't grow much faster than corporate earnings, says H. Bradlee Perry, of David L. Babson & Co. in Cambridge, Mass. Earnings have gained about 7 percent a year, well below stocks' recent sizzling pace, he notes.

"1997 will be a year for selectivity" in buying stocks or mutual funds, says James Cloonan, chief executive officer of the American Association of Individual Investors (AAII) in Chicago. He predicts the market's upward thrust will continue, largely because of continued investing by baby boomers who are salting away retirement dollars. "But the year immediately after a presidential election historically is not all that good," in terms of market gains, he says. Thus, there could a slowing as early as February, he says.

WHAT does all this mean for the average investor, or someone who suddenly receives $50,000 from a pension payout or an inheritance?

Invest in a solid, well-balanced mutual fund, says Paul Collins, president of American Trust Company, a financial-management firm in Lebanon, N.H.

"The stock market is expensive" in terms of valuation levels, he says. But "stocks provide the best returns over time." Nor should advancing age inhibit investing in equities, Mr. Collins suggests. While younger people might want 75 or 80 percent of their portfolios in stocks, people in their 60s might want to have 65 percent in stocks.

Dr. Cloonan adds that it might not be wise to invest a lump sum in one chunk, especially with the market at historical highs. Instead, average the money into the stock market, by investing small amounts over the course of a year or more.

Keep your portfolio be diversified, experts say, among different types of stocks - such as large-company, small-company, and international equities - and fixed-income investments. James Stack, who publishes InvesTech, a newsletter on mutual funds, says money-market funds may beat both bonds and stocks next year.