Analysts Cautious at ‘Business New Year’

NEW YORK — Labor Day may mark a change of seasons on Wall Street, but many analysts aren’t sure the stock market is ready to emerge from its “summer doldrums” just yet.

After climbing almost without interruption from January to mid-July, stock prices have since pulled back a bit. In the eyes of many market watchers, this represents a healthy cooling-off period that could last for some time without disturbing their long-term optimism.

Expectations for the short term are subdued as the vacation season ends and the traditional “business New Year” arrives.

“Consolidation would be healthy,” say analysts at the Outlook, a weekly publication of Standard & Poor’s. “Recent speculative activity placed the market at risk. A settling-down period is needed.”

Many things have gone right for the stock market through the first two-thirds of 1995. The Federal Reserve Board ended the credit-tightening campaign it pursued in 1994, and even began to nudge short-term interest rates lower. Corporate earnings reports showed strong gains, and investors kept pouring money into mutual funds that invest in stocks.

But as stock prices repeatedly climbed to new highs, increasing numbers of analysts worried that investors’ enthusiasm was outrunning the positive fundamentals.

“I am one of the people feeling distinctly uncomfortable as I go over the columns I read daily, plus other indications of speculative fever rising,” said Raymond F. DeVoe Jr. at Legg Mason Wood Walker Inc.

Forecasters also say there is considerable cause to question how long the news background can remain as positive as it has been.

But quite a few of the bulls say they are not wavering in their commitment to stocks. “Following the first half’s outsize gains, more moderate expectations are in order for the stock and bond markets--especially in the near term,” says Wright Investors’ Service, a Bridgeport, Conn., money management firm.

However, Wright argues that “while weakness in stock prices is possible between now and year-end, investors in high-quality stocks should be amply rewarded in the next few years.”

“Moderate economic growth, rising profits and reasonable price-earnings valuations constitute a favorable backdrop for equities,” Wright says. “For bonds, low inflation and the prospect of lower interest rates should make for a period of above-average real returns.”

Adds William LeFevre at Ehrenkrantz King Nussbaum Inc.: “Now that the Federal Reserve has started to ease short-term rates--and we look for another cut in late September--we expect that corporate earnings growth will pick up again.

“We view the current dip in the averages as a temporary pause and a buying opportunity.”