WHERE WILL the stock market go now? This is, of course, a variety of opinion.
Optimists say the best is yet to come. They point to a strong economy, moderate inflation and price-earnings ratios, though higher than normal, still below record levels reached before the 1987 crash.
Russ Kaplan's Heartland Adviser says, "Although signals point to a correction, we know in the long run stocks outperform all other investments. We're keeping our money in the market."
Laszlo Birinyi says in Forbes this month: "Most 'bears' have been prominent during this entire bull market. This market will strengthen. I expect at least one Fed tightening, but it won't be terminal for stocks."
And a widely publicized Ibbotson Associates study shows that $1 invested in 1926 in what now includes the S&P; 500-stock index is now worth $810, compared with only $12 invested in T-bills and $25 in long-term government bonds.
Nevertheless, there are many who have turned gloomy.
In this week's Barron's, Steven Leuthold says, "A shift in psychology will crush this market. Fund managers are slaves to cash inflows. A 10 percent market decline could shift massive inflows to outflows. What could cause the first 10 percent decline? Just about anything. It won't be pretty."
Robert Farrell, a Merrill Lynch strategist, notes, "Blue chip stocks that led the market higher are going to an extreme that is unsustainable."
He points out that Coca-Cola trades at 44 times earnings, 63 percent above its P/E two years ago. He adds that Merck's 30 P/E ratio is up two-thirds from its former level.
Charles Pradilla, Cowen & Co. strategist, warns, "If interest rates rise, expect a sharp and dirty 15 percent correction."
My advice: If you're young or middle-aged, hang on to your stocks for the long pull. "Max-out" on retirement plans.
If you're elderly, cut back about 20 percent on stocks, pay the capital gains tax and don't look back.
In either case, consult your stockbroker. He or she knows your personal situation better than I do.
Regarding the above gloomy consensus, here are timely thoughts by experienced investors:
"The first rule is not to lose. The second rule is not to forget the first rule." (Warren Buffett.)
"Entrances are wide, exits narrow." (1997 "Stock Trader's Almanac.")
"Some day, no one can tell when, there will be another speculative climax and crash. With time, the number who are restrained by memory must decline." ("The Great Crash of 1929" by John Kenneth Galbraith.)
"Stocks have reached what looks like a permanently high plateau." (Yale professor Irving Fisher, on Oct. 15, 1929, a few days before the crash that set off the Depression of the 1930s.)
Pub Date: 2/21/97