Dow Rallies Slightly; Ends Week Down

Worries about weak corporate earnings continued to bedevil Wall Street on Friday, as the stock market closed out its worst week since January.

The Dow Jones industrial average barely halted a four-day losing streak, managing a four-point gain Friday to 8,937.36, but that still left the blue-chip index down 400 points, or 4.3%, from last Friday’s record close of 9,337.97.

The picture was worse in the broader market. Losing stocks outnumbered gainers by about 9 to 5 on the New York Stock Exchange, for example. And the technology-heavy Nasdaq stock market fell for a fourth straight day, finishing the week at 1,930.99 points, down 4.1% from Monday’s record close of 2,014.25.

Still, the week’s declines fell far short of the decisive “blowoff” that some market watchers had been predicting as stocks climbed to historic valuations.

Much of the week’s selling was by money managers trying to lock in profits and take a conservative stance in a market that had started to look treacherous, experts said.

Even as the Dow rose sharply from mid-June through last week, the number of stocks participating in the rally was narrowing. Investors were gravitating toward household names with consistent earnings growth.

“The feeling is that the safe stocks are the ones that give people the fewest jitters,” Alan Ackerman, market strategist for Fahnestock & Co., said Friday.

Some of the best-known--General Electric, Microsoft, Coca-Cola, to name three--faltered a bit this week after hitting new highs last week, although GE bounced back Friday to help the Dow eke out its gain. GE gained $1.69 to $91.69.

Value-oriented money managers who try to find stocks that trade in line with, or at a discount to, their profit-growth prospects, continue to be frustrated by this market.

“Valuation measures are just in la-la land,” David Dreman of Dreman Value Management said Friday. “These Internet stocks are trading at values not seen since the South Sea Bubble [of 1720].”

Nola Falcone of Evergreen Funds noted that among stocks with market capitalizations of $5 billion and up, the quartile with the highest price-to-earnings ratios have returned nearly 48% so far this year, while the lowest P/E quartile has returned only 6%.

Some of the lower P/E stocks have shown terrific earnings growth but have not been rewarded with similar rises in stock price, she said.

“I think money managers are a little lazy,” Falcone said. “They are not really doing their job of spreading money around to the best values.”

But Lehman Bros., which has been one of the most bullish of the Wall Street brokerage houses, continues to bet on the big blue chips.

“We’re operating under the assumption that there could be a 5% to 7% contraction at any time, but that wouldn’t change our positive view about equities,” said Arun Kumar, Lehman’s chief U.S. stock strategist.

Kumar believes that the U.S. economy’s low-inflation, moderate-growth climate continues to bode well for the stock market and that large-capitalization stocks remain best poised to benefit.

Lehman is predicting a further 10% run-up in the Standard & Poor’s 500-stock index, to 1,250 points by year-end, plus an additional 12% rise next year, to 1,400.

G. Kenneth Heebner of Capital Growth Management in Boston thinks defensive investors should favor real estate investment trusts over stocks because the REITs are paying high dividends and there is still strong demand for office and industrial space.

“Then if the [stock] market goes down, you just bask in the glow,” he said.

After Thursday’s 195-point drop in the Dow industrials, Friday opened with a strong bounce-back. The Dow rose as much as 69 points early in the trading day, but then slumped and at one point was down 65 points before recovering.

The S&P; 500 and Nasdaq both lost 3.9% this week, the worst result for both indexes since a drop of more than 4% in the week of Jan. 5-9.

Still, Nasdaq is up 23% for the year, the S&P; is up 18% and the Dow up 13%.

Certain technology shares sold off sharply. Gateway, the mail-order computer seller, dropped $6.13, or 10%, to $52.63. Silicon Graphics fell $2.63 to $11.50.

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Market Roundup, D4