Zigzag Course Seen for US Stocks Slow Economy and High Price/earnings Ratios Make Investors Wary after Nov. 15 Drop

Article excerpt

THE United States stock market is expected to be buffeted by continuing uncertainties about the underlying stability of the US economy.

The upshot: The market - as measured by the popular Dow Jones industrial average - is expected to make a lot of "zigs and zags" during the weeks ahead, according to Hildegard Zagorski, a vice president with Prudential Securities Inc.

Investors breathed a sigh of relief Nov. 18, when the Dow average closed at 2,972.72, up 29.52 points. On Friday, Nov. 15, the stock market had nose-dived 120 points, closing at 2,943.20 points. That was the largest one-day decline since Oct. 13, 1989, when the market plunged 190 points.

Early this week, however, there had been concern that the market might do worse than 1989 and repeat the severe market downturn of late 1987. On Monday, Oct. 19, 1987, the market plunged 508 points, following a drop of 108 points the prior Friday.

Although the Friday-Monday pattern of 1987 didn't repeat itself this year, that does not mean that stock prices are no longer vulnerable. Far from it. Investors are now glued to daily press reports about the well-being of the economy. "There are just a lot of questions being asked now: about whether there could be a double-dip recession, whether the economy will keep growing, what happens to interest charges on credit cards, and countless other things," Ms. Zagorski says. Last Friday's 120 point downturn "was not the end of the {current} bull market; but it does add up to a little bit of a lull."

"I don't think I've ever seen so many {adverse} factors come together at one time as happened last week," says Gene Jay Seagle, an official with Gruntal & Co., an investment house. Program trading was a factor in the downturn, he notes, as was a press report that General Motors Corporation's dividend might be cut in the next few months. He also mentions the recent vote by the US Senate to cap interest rate charges on bank credit cards at 14 percent, the collapse of the speculative biotechnology stock sector, and "a rumor about a possible new Soviet coup."

Put all of that together with evidence of weaknesses in the US economy, says Mr. Seagle, and there were more than enough ingredients for the downturn of Nov. 15. Still, he insists, this "is not a replay of 1987, or even 1989."

Current interest rates, Seagle notes, are far lower than they were in 1987, which means that there are fewer places for investors to put their money than was the case back then; moreover, trading curbs circuit breakers have been imposed on the stock market to prevent the type of "free-fall" that occurred in 1987. …