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                                                                                BUSINESS, Page 49

Nowhere to Invest


Rock-bottom interest rates forced investors to flee to the stock
market, but now their last refuge looks scary

By THOMAS MCCARROLL


    When Lawson Brown set out to reinvest his family's
$70,000 nest egg a few months ago, the Minneapolis, Minnesota,
probation officer found his options limited. Brown, 39,
considered mutual funds to be "unexciting." Certificates of
deposit? "Get real," he says. "Not with bank rates of 3%."
Bonds? "Same problem." The only alternative, he says, was the
stock market. He took the plunge, scoring short-term gains in
high-tech stocks and banking issues, which lulled him into a
sense of security. Now he and other investors are getting a loud
wake-up call from the market's bumpy decline in the past few
weeks, which has raised fears of a major correction ahead. But
Brown is not fleeing just yet. Asks he: "Where else can you go?"

    Brown is not alone, and his question helps explain why the
stock market has so far managed to avoid a crash despite
enduring such woes as a weak economy and global currency
turmoil. With interest rates at their lowest levels in decades,
stocks have been practically the only game in town. Small
investors by the millions have deserted certificates of deposit
and money-market funds in favor of the higher potential returns
on equities. Since 1990, individuals have shifted an estimated
$100 billion out of stingy bank CDs into the stock market. More
than a quarter of the $120 billion they invested in mutual funds
during that period has also ended up in the market. The sudden
inflow helped propel the Dow Jones average to new heights last
May, when it broke the 3400 barrier for the first time. By
propping up the market with their new money, investors like
Brown may have prevented or postponed the steep correction that
analysts think is probably inevitable.

    Lately the market's spasms of insecurity have grown more
profound. In a stampede of selling last Monday, the Dow dropped
more than 100 points by noon, only to bounce back to a modest
22-point decline for the day. The Dow finished the week down 64
points, at 3136.58, a 240-point decline since mid-September.
Many analysts attribute the pessimism to a host of misgivings,
including uncertainties about the outcome of the presidential
election. Most worrisome has been the prospect of an extremely
sluggish economic recovery and the apparent decision by the
Federal Reserve Board not to cut interest rates any further.
"The market is suffering from a bad case of high anxiety due to
all the uncertainty," says Donald Straszheim, chief economist
at Merrill Lynch. "After all," he quips, "it's October."

    His remark is only half in jest. In a business that
thrives on mystery and superstition, Wall Street has good reason
to be wary of this particular month. Six of its nine biggest
one-day declines occurred during October, including Black Monday
in 1929 and the Roaring Eighties crash of 1987. The last major
collapse, the minicrash of 1989, also took place in October.
While some traders suspect goblins, others blame more mundane
forces. One is the so-called calendar effect, which is the
result of October being the month when many corporations revise
summertime earnings forecasts. Often those projections turn out
to have been too rosy, forcing companies to cut estimates.

    Some analysts, dwelling on the fundamentals rather than
superstition, think the epic bull market that began in 1982 has
finally entered a long season of bearishness because of the
likelihood of very slow economic growth in the 1990s. "We're
going through another market crash right now," contends Albert
Sindlinger, who heads the consumer-research firm that bears his
name. "But instead of suddenly falling off the cliff, it's
collapsing over a period of time."

    Investors worry about the election, apparently fearing
both candidates in roughly equal measures rather than showing
Wall Street's usual preference for a Republican. Analysts see
Clinton's program as potentially inflationary, while they
consider Bush's to be stifling in its sameness. To differing
degrees, both candidates have proposed more spending and
incentives for infrastructure and technology, which has boosted
some stocks in those categories. But the overall market will
probably stay in a holding pattern until Nov. 3, says Roger
Servison, retail-group president at Fidelity Investments. Says
he: "There's a lot of pent-up demand building out there."

    During the anxious pre-election gyrations, though,
analysts recommend that investors stay put -- either in the
market or out of it. Small investors, says John Markese,
president of the American Association of Individual Investors,
"should close their eyes and wait it out." Many individuals have
fled to the relative safety of diversified mutual funds, such
as Fidelity's Asset Manager, which spreads out risk by investing
in a mix of stocks, bonds and money-market instruments.

    By not panicking in reaction to sudden downdrafts,
stockholders have avoided the kind of rush for the exits that
can result in a major crash. After the election, the decisive
struggle will be waged on Wall Street. It will be the oldest
fight of all: the battle between bull and bear to determine the
direction of the stock market during the next four years.