Your Money : Strong on Stocks : Record Market Level Is Justified, Lynch Says

Peter Lynch, the former top-flight mutual fund manager with Fidelity Investments, said Wednesday that the stock market’s record level is fully justified by strong corporate profits and the expanding economy.

“All these people who say the market’s too high, the economy’s expanded too long--there’s all these statistics--they’re total garbage,” said Lynch, now a director of Fidelity and a best-selling author.

“The market on current earnings is not overpriced. It’s not underpriced,” he told corporate executives at a breakfast in Boston.

Robust corporate profits in the first quarter have driven the Dow Jones industrial average to close at record highs three days in a row over the last week.

But the massive gains in the market, which has climbed more than 450 points, or about 12%, since the beginning of the year, have led many observers to predict a coming retreat in stock prices.

Lynch, former portfolio manager of Fidelity’s Magellan fund, which grew to the world’s largest and the best-performing equity mutual fund in the 1980s under his guidance, made no predictions of where the market will head.

But he dismissed fears that inflation will soon put a damper on the economy, and said the falling dollar, which has kept many stock pickers cautious, is not a sign that the United States is losing its competitive edge.

“People talk about the coming inflation--we’ve had it,” he said.

Health care costs, the single-largest component of inflation, are rising at a lower rate and the prices of many building blocks of the economy, such as raw materials, have already peaked, he said.

“We’ve been very lucky on energy (prices). That’s the only scary picture on the horizon that I see.”

He said the fall of the dollar is a structural problem, partly due to Americans having a substantially lower savings rate than the Japanese.

“You simply don’t have an ability to spend (in Japan),” he said. “The money’s building up and they can’t spend it. We need about 10,000 great American shoppers to go over there and show them how to spend.”

The capital gains tax rate in the United States, which he said is at an all-time high of 28%, discourages Americans from investing and instead promotes spending. There is no capital gains tax in Japan.

“The capital gains rate is way out of proportion,” Lynch said. “We need to cut the capital gains rate.”

While the broad market has lagged behind the strong pace of blue chips, Lynch also sees yields growing among medium- and small-sized companies.

He said the dividend yield on Standard & Poor’s 500 index, currently at 2.69% and close to an all-time low, has dented returns in the broad market, but dividends are likely to climb this year.

“I think you will have a very strong year for profits and dividend raises,” he said.

Despite the strong gains in the market, average investors have remained unduly cautious, he said.