IT'S THE IDEAL scenario for investors: Steady and modest growth with minimal inflation. Thus, it was no surprise yesterday when a flurry of good-news reports out of Washington helped send Wall Street stock brokers on yet another emotional high, with a tenth-straight record-setting day for the Nasdaq index and the Dow Jones average finishing above the 8000 mark for the first time. At this rate of investor exuberance, the Dow at 10,000 could happen sometime next spring.
Cautious financial analysts have been warning for months that the continuing surge in stock prices would end soon as inflation shows hints of reigniting or the economic numbers turn soar. It has yet to happen. This unparalleled bull market could be with us for some time to come.
Corporate earnings continue to prove surprisingly robust, especially among technology leaders such as Intel, Texas Instruments and Microsoft. Basic industries, such as auto manufacturers and chemical companies, also report sharp profit increases. A big reason could be enormous productivity gains corporations are reaping through evolving high-tech advances, especially computer technology.
The rate of inflation was a mere 1.4 percent for the first half of the year -- versus 3.3 percent a year ago. It is the smallest rise in 10 years. Increased worker efficiency seems to have blunted wage pressure, even in a tight job market. Economic growth for the second quarter is estimated at less than 2.5 percent, with a modest rise to the 3 percent or 4 percent range for the rest of the year.
Wall Street's fortunes have been helped immensely by two other trends: The glut of corporate mergers ($118 billion in just six months) that has diminished the supply of stocks, and $70 billion of stock repurchases, also boosting stock prices. And while some $18 billion flowed into mutual stock funds in June, the public still has $4 trillion in short-term liquid assets. That cash horde could fuel future market advances.
Investors react to forecasts of future economic trends. They also react emotionally based on the prevailing mood in the country. Right now, consumer confidence is high, unemployment is low, deficit problems are dwindling as the vibrant economy generates far more tax revenue than predicted. Of course, any unexpected event could trigger a bearish stampede. Or the Federal Reserve might step in to quell what it considers an over-exuberant market. But for the moment, the indicators point toward more record-setting days as the bulls continue their rampage on Wall Street.
Pub Date: 7/17/97