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Analysts Warn of Bear Market

By Brett D. Fromson
The Washington Post
NEW YORK

With the stock market continuing to fall from its January peak, a growing number of Wall Street analysts are warning customers that a major correction, if not a long-term market decline, is underway.

Those who have joined the pessimists' camp say the reasons abound for their dim view of the market. They cite rising interest rates, inflationary expectations, a slowdown of mutual fund money pouring into stocks, and worldwide political uncertainties.

Since late January, when it neared the 4,000 mark, the Dow Jones industrial average has fallen 216 points, or 5.4 percent, including 120 points last week and another 12 today. Other indexes have fallen as well. The Nasdaq stock market composite index, which tracks smaller companies, is off about 4 percent.

Some analysts are hoping this is no more than a long-awaited correction, a short-term decline in an otherwise rising market that helps to keep speculative fervor in check.

But if this slide marks the start of a long, sustained decline in stock prices -- a full-fledged bear market -- it would be bad for the economy, for federal regulators and for President Clinton, who has largely enjoyed the benefits of rising stock prices.

A rising stock market can boost the economy by making Americans feel prosperous and more willing to spend.

Richard McCabe, chief market analyst for Merrill Lynch & Co., has told the firm's clients to expect a market decline of 15 to 25 percent.

Pessimism is spreading on Wall Street at a time when the economy is expanding and corporate profits are improving, which normally would make traders bullish.

But many analysts believe stock prices still are high relative to profits and dividends paid to investors.

Dividends would have to improve significantly to justify current stock prices, according to Ned Davis, head of Ned Davis Research Inc.

Another cause of worry to some traders is that big professional investors have been taking profits on days when stock prices advance and are buying less aggressively when prices fall.

"There is no conviction," says John Burnett, a senior stock trader at Donaldson, Lufkin & Jenrette, a brokerage based in New York City. "And that is normally associated with bear markets."

That is why Burnett and others think the market is primed to fall further. "Uncertainty leads to selling," he said. Burnett said he believes the chances that this is a bear market rather than a correction are 50-50.