Observers' feelings are mixed about stock market's future

Perhaps Michael Jordan's return to basketball is what the Dow Jones industrial average needs for the added boost to soar far into the rarefied air of 4000 and stay there.

But then again, maybe that's not enough. This 1995 stock market has high ambitions but often suffers from lead in its shoes because of mixed economic signals at home and abroad.


Continuing fear that a correction will send the market tumbling stems from a distinct possibility that the "perfect" game plan everyone's hoping for won't come to pass.

That winning scenario includes a healthy economy with no earnings disappointments whose speed won't trigger inflation gains. Not all pundits buy into such upbeat prospects, although the recent decline of the greenback does mean positive opportunities for multinational companies such as PepsiCo, McDonald's Corp. and Microsoft Inc.


"The probability of the optimistic scenario is lower than investors expect, and I'm focusing short term on capital preservation," said Katherine Hensel, chief investment strategist with Lehman Brothers. "In some minds, 4000 on the Dow was a resistance level and bullish sentiment was enhanced by its ability to pierce through, but it's still simply a number."

Take profits where you have them, she recommends. She suggests a defensive portfolio of 30 percent cash, 40 percent stocks and 30 percent bonds.

Among oil companies, Ms. Hensel's choices are Amerada Hess, Unocal Corp., Total Petroleum, Chevron Corp. and Texaco Inc. In utilities, her favorites are Niagara Mohawk Power, Southern Co. and FPL Group. Any regional Bell telephone company makes sense, she believes. Consumer cyclicals are a good bet, especially General Motors, Ford Motor Co., Maytag Corp. and Whirlpool Corp.

"I don't believe projections that, based upon everything being perfect, inflation will be just right, interest rates will be just right and the economy will have a 'just right' landing," said John Rogers, president of Ariel Capital Management Inc. in Chicago.

"The 4000 level is a time for caution, since I wouldn't be surprised to see two more rate hikes by the Federal Reserve of a half [percentage point] or a percent each."

Consumer companies should be a safe haven from higher inflation and higher interest rates. His favorites are Clorox Co.; First Brands Corp., maker of Glad plastic bags; Russell Corp. athletic wear; the Omnicom advertising agency, which has many consumer product clients; and the Rouse Co. mall development firm.

Others see a market with little up or down bounce.

"We're in a Never-Never Land, without a lot of upside potential in the equity market but no fundamental need for a downside correction, either," observed James Annable, chief economist for First National Bank of Chicago. "That leaves us pounding around the levels where we are today."


The Dow has had quite a ride, he pointed out. It languished in the late 1960s on through the 1970s. Following the 1987 crash, it fell below 2000, but then from 1988 to 1995 doubled.

Where it goes from here can't be drawn directly from precedent.

"Sometimes when stock indexes hit those big, round numbers, they will rise substantially further, while other times they fall right back, or bounce around the number for three months to five years," said Donald Straszheim, chief economist with Merrill Lynch & Co.

The bad news is that there's uncertainty about emerging markets and economies around the world that isn't likely to end soon. The good news is that the Federal Reserve probably won't enact major rate increases.

Capital goods, telecommunications and technology are likely areas of success, Mr. Straszheim predicts. He expects long-term bond yields and short-term rates to stay relatively close to where they are for the next six months.

"My clients have a longer-term time frame, meaning short-term events aren't so important," explained Marilyn Capelli, certified financial planner and senior vice president of Citizens Bank of Flint, Mich.