Financial Planning: A Midyear Guide 1987 : part two: The Stock Market : Investing in Stocks Grows Riskier

Bulls and bears often don’t see eye to eye. But there is one thing many of them agree on: Investing in stocks these days is getting riskier and riskier.

With the bull market well into its fifth year--during which the Dow Jones average of industrial stocks tripled in value--further stock gains will be harder and harder to come by, many experts say. Even some of the most bullish prognosticators say that while stocks could rise dramatically this year and next,

a steep slide is a real danger farther ahead.

“The market will probably crash,” but not until after the Dow industrial average reaches 3,600 next year from its current levels around 2,400, said Al Frank, editor of the Prudent Speculator, a Santa Monica newsletter.

“The market is overvalued, so the odds are we’ll be heading into a bear market at some point,” said Martin E. Zweig, chairman of the Zweig Fund, a New York-based mutual fund, and publisher of a newsletter bearing his name.

Zweig and many other market watchers say the Dow is currently in a “trading range” of between about 2,100 and 2,500.

Whether the index can go much higher than 2,500 depends a lot on the outlook for two of stocks’ worst enemies: high interest rates and inflation.

Many bullish forecasters say the market will benefit from lower interest rates and subdued inflation. The uptick in interest rates in April and May--which chased foreign and domestic investors from the U.S. stock market--was a temporary phenomenon in reaction to the falling dollar, economists say.

Now that the dollar has stabilized, “a lot of money from foreigners will again be chasing financial assets,” said Werner E. Keller, director of research at the Los Angeles brokerage of Bateman Eichler, Hill Richards. A stable dollar also will allow for further declines in interest rates and reduce pressure on inflation, economists say.

The appointment of Alan Green-

span to replace Paul A. Volcker as Federal Reserve Board chairman also has been seen as positive for the market, since Greenspan is expected to be as ardent in fighting inflation as Volcker.

Another bullish factor will be expected strong gains in corporate earnings the rest of this year as companies finally reap the benefits of vast cost cutting and restructuring efforts.

High amounts of cash held by mutual funds, domestic institutions and foreigners also bode well for a continued bull market, experts say. That cash will find its way into equities, the bulls reason.

Bulls also note that investors have yet to demonstrate the uninhibited speculation and wild optimism that has marked the end of bull markets in the past.

In fact, surveys show that many market experts are pessimistic. The ratio of bearish newsletter advisers increased to 30% earlier this month, up from 12% in February, while bullish advisers have fallen to 37.6% from 65% in February, said Michael L. Burke, editor of Investors Intelligence, a New Rochelle, N.Y., newsletter that polls newsletter advisers.

Burke and other experts contend that such high pessimism is actually bullish for the market because pessimists have lots of cash available to invest in stocks. By contrast, excessive optimism usually signals market tops because investors already have their cash fully into stocks, leaving no cash left on the sidelines to fuel further buying.

“I haven’t seen the euphoria yet,” said Robert R. Prechter, a leading market forecaster and editor of the Elliott Wave Theorist, a Gainsville, Ga., newsletter. He predicts that the Dow industrial average will streak to at least 2,700 by year-end. “I wouldn’t be surprised to see a 3,000-plus Dow later this year,” Prechter added.

But bears and other pessimists contend that cash on the sidelines will not necessarily boost stock prices because interest rates and inflation will go higher, not lower.

The weak dollar, bloated federal budget deficit and economic sluggishness in such countries as Japan and West Germany leave the

Fed little room to ease credit conditions to reduce interest rates, argues Jeffrey M. Applegate, investment strategist for the brokerage firm of E. F. Hutton.

Higher interest rates and inflation will drive excess cash away from stocks and into Treasury securities, bank certificates of deposit, money-market funds and other investments, bears say. “Money goes where it’s treated best,” said Carlton G. Lutts, editor of the Cabot Market Letter, a Salem, Mass., newsletter.

Bears contend that price-earnings ratios and other measures of stock values are near levels that signaled market tops in the past. For example, the price-earnings ratio, which measures stock prices divided by earnings per share, is about 19 for the Dow industrial average and the Standard & Poor’s 500-stock index. Ratios of 20 in those indexes have signaled past market tops, said Charles Allmon, president of the Growth Stock Outlook Trust, a mutual fund in Chevy Chase, Md. “This is a speculators’ market, not an investors’ market,” Allmon said.

While the bears and bulls disagree about the market’s direction, most agree that money can still be made by picking the right stocks. But with greater risk in the market, picking successful stocks has become a lot harder.

“In 1982 you could throw darts” and pick winning stocks, editor Frank said. “But now you have to pick your stocks carefully.”