Strategists Lift Targets for Dow Industrials as U.S. Stocks Keep Surging
Strategists Lift Targets for DJIA: U.S. Stocks Outlook (Repeat)
(Repeats story from April 30, adds comment in 29th
paragraph.)
New York, May 1 (Bloomberg) -- If the Dow Jones Industrial
Average matched this month's performance for the next eight
months, the benchmark would close out 1999 having tripled.
While no one expects that to happen, the average has
already surpassed most of the optimistic Wall Street analysts'
predictions for the year, prompting even the most bullish
strategists to boost their estimates.
Peter Canelo, U.S. Investment Strategist for Morgan Stanley
Dean Witter & Co., this week said he expects to see the Dow
between 11,400 and 11,600 at the end of the year.
''I'm not sure it will stop there,'' said Canelo, whose
target had been 10,250.
Since the Dow first closed above 10,000 on March 29, the
average gained 8 percent more, even with an 0.8 percent decline
to 10,789.04 friday. For the week, the Dow is up 0.9 percent.
The Standard & Poor's 500 Index dropped 1.6 percent, the Nasdaq
Composite Index fell 1.9 percent, and the Russell 2000 Index of
small stocks gained 0.25 percent.
Should the Dow close the year at 11,000, investors will
have seen the average return an unprecedented fifth-straight
year of double-digit growth.
Better-than-expected earnings from U.S. companies provided
some of the impetus for target revisions, and may prompt more
such changes later.
Lehman Brothers Inc.'s Jeff Applegate, who believes the
market is at ''fair value,'' raised his target on the Dow
average two weeks ago to 11,500 from 11,000 and may raise it
again ''if earnings surprise again on the upside.''
''We have taken our earnings estimates up and this market
is more earnings driven than last year,'' said Applegate, who
still recommends buying computer and technology stocks, as he
has since 1992.
Earnings Growth
With 86 percent of the companies within the Standard &
Poor's 500 having reported first-quarter earnings, analysts
expect profit growth of 9.3 percent from a year ago. A month
ago, analysts expected growth of just 6.4 percent.
Individual investors are optimistic, too. Fidelity
Investments, the nation's largest fund group, said flows to its
equity funds rose 77 percent in April, and Vanguard Group
reported a 42 percent rise. Charles Schwab Corp. saw flows to
stock funds in its mutual fund supermarkets surge six-fold in
April.
''I feel better about the market than I did at the
beginning of the year,'' said Marshall Acuff, an equity
strategist at Salomon Smith Barney. ''We now seem to be in a
period where there are rising earnings expectations.''
The market's best-known optimist, Goldman, Sachs & Co.'s
Abby Joseph Cohen, called first-quarter profit reports from U.S.
companies ''absolutely stunning,'' and indicated she's prepared
to raise her year-end forecast from the current 10,300 once most
companies have reported.
Laszlo Birinyi, president of Greenwich, Connecticut-based
Birinyi Associates Inc. repeated his prediction that the Dow
average will close the year at 12,000. Birinyi studies money
flow, a gauge of conviction that looks at the number of shares
changing hands as a stock rises and falls.
''Money flow shows continued buying in the market,'' said
Birinyi. ''Even a few weeks ago, when tech (stocks) were in the
doghouse, people were still buying.''
Funds Flow
Investors pumped a total of about $6.38 billion into U.S.
stock mutual funds over the past week, according to Trimtabs.com
Investment Research, a Santa Rosa, California-based firm that
tracks fund flows. That far exceeded the estimated $110 million
that went into U.S. stock funds the week before.
And Birinyi Associates estimates that another $1.5 trillion
dollars sitting in money-market accounts -- $100 billion more
than at the start of the year -- could find its way into equity
markets.
Economic growth that shows no sign of faltering is what's
got investors excited about stocks, strategists said. ''The
global economy is not falling apart and there is no slowing in
the U.S. economy,'' said Morgan Stanley's Canelo. ''Durable good
orders are higher and that's important for the cyclicals in the
Dow.''
The Commerce Department said friday gross domestic product
grew at a 4.5 percent annual rate in the first quarter, while
analysts expected a 3.4 percent pace. That followed a report
earlier this week that factory orders for big-ticket items, such
as cars and washing machines, rose in March for the fourth time
in the last five months.
The Dow Jones average includes 12 industrial stocks, such
as Alcoa Inc., the world's largest aluminum producer, and heavy
equipment maker Caterpillar Inc., whose fortunes are closely
tied to the economy, according to First Call Corp.
Cyclicals Lead
These so-called cyclical stocks, which lagged computer-
related and other growth stocks in recent years, rallied in the
last two weeks on anticipation they will benefit the most from
global growth.
Ralph Acampora, Prudential Securities Inc.'s technical
analyst, reiterated his call for the Dow to touch 11,500 by the
end of the year. ''We are still very optimistic and continue to
expect the DJIA to attain a level of 11,500,'' he said in
commentary on Prudential's Web site.
Last week Acampora told Australia's ABC-TV, ''I'm in the
camp of the Dow being at 20,000 or maybe 30,000 in the next 10
years.''
Investors and strategists alike are alert for any event
that could cloud stocks' rosy future.
''There won't be a cataclysmic decline but the market is
priced for perfection,'' said Martin Sass, president of M.D.
Sass Investor Services Inc., which manages $14 billion.
Trouble Ahead?
What would mar perfection? ''The U.S. economy is dragged
down by the rest of the world, or there's a global recovery
which accelerates inflation,'' he said. Higher prices could
prompt the Federal Reserve to raise interest rates to choke
economic growth.
By his reckoning, stocks are 10 percent overvalued based on
anticipated earnings and the outlook for interest rates.
Still, Sass said the market could go higher. His equity
valuation model indicated stocks were overvalued by 40 percent
in October 1987. The Dow average fell 22.6 percent on Oct. 19 of
that year, its worst one-day percentage decline ever.
Another concern is that rising commodity prices may be
signaling future inflation. Crude oil for June delivery rose 72
cents, or 4 percent, this week to $18.66 a barrel on the New
York Mercantile Exchange, the highest closing price since Dec.
9, 1997. Prices have risen 64 percent since mid-February.
Donald Coxe, chief investment strategist at Harris
Investment Strategy, said, ''What the market now has to face is
that, with stocks such as Alcoa drastically outpacing the
market, is that is this a sign of returning inflation?''
Douglas Cliggott, a strategist with J.P. Morgan & Co. and
Don Hays, a strategist with Nashville, Tennessee-based Wheat
First Union Corp. and a long-time bear, reiterated their year-
end targets of 9300 and 7500 respectively.
With the Dow average hovering near record highs ''the
market is discounting a significant acceleration of earnings for
this year and next,'' said Cliggott. ''The big risk is that this
powerful cyclical recovery, which is a huge positive for
earnings, suggests rising interest rates.''
In a note to clients, Hays said that all the optimism for a
global economic recovery may already be built into share prices.
-- Nick Olivari
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