When Greenspan speaks . . . Investors should listen: Those holding stocks ought to heed the Fed chairman's caution that what goes up must come down.


THE GUARDIAN of this country's seven-year expansion has once again urged investors to temper their expectations. Stock markets around the globe shuddered. Prices on Wall Street plunged 116 points in two days. But they are likely to recover, as they have in the past after Alan Greenspan's warnings.

Still, the Federal Reserve Board chairman's cautionary words served their purpose. Investors cannot be reminded often enough that the business cycle of ups and downs has not been repealed, despite talk of a technology-driven "new paradigm." The heated economy will, indeed, cool. Stock prices will not rise each and every year by 20 percent or more.

Last December, Mr. Greenspan briefly curbed investor euphoria by warning of "irrational exuberance" in the markets. This time, he noted that the economy "has been on an unsustainable track" and raised the fear that rising wage pressure could cut into corporate profits. That might trigger a round of inflationary price increases, which is what the Fed chairman has been so doggedly trying to prevent.

Yesterday's drop in the nation's jobless ranks -- the lowest total in nine years -- confirmed Mr. Greenspan's concern over a tightening labor market. Even with increased efficiencies through new telecommunications and computer technologies, American businesses are running out of skilled workers. That could put heavy pressure on companies to raise salaries for the workers they have.

If economic statistics hint at new inflationary pressures from the labor squeeze, Mr. Greenspan could ratchet up interest rates to slow the economy's growth, and the need for more workers. But so far, his remarks amount to an early-warning signal to investors that he is ready to act -- if necessary -- even before the Fed's next meeting in November.

Most signs, though, continue to point to a vibrant economy without much inflation. Consumer prices are creeping up at the slowest rate in 11 years. Major retail chains reported slow September sales, hardly a sign of rampant consumer spending.

Other companies may start reporting less robust growth, too, in the months ahead. Wall Street analysts expect corporate profits to rise in the coming year, but only in the 8 to 10 percent range. Mr. Greenspan wants small and large investors to heed these projections. Otherwise, they may be in for some unpleasant market shocks in 1998.

Pub Date: 10/10/97

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