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Business News & TipsAlan Moore / L’Observateur / August 19, 1998Market indices have reached new highs on the strength of overall second quarter earnings reports, continued downward pressure on interest rates, and robust cash inflows into stocks via mutual funds. Performance hasbeen skewed to large-capitalization and technology stocks. In addition,”Internet” stocks have captured the attention of traders and the media with their spectacular performance (and volatility). These Internetinvestors have dismissed warnings of high valuations with their belief that conventional “metrics” are unable to reflect the revolutionary change the Internet holds. Indeed, how else to explain Internet booksellerAmazon.com’s two-month tripling stock price, $7 billion marketcapitalization, and forecast of continued losses for at least the next two years.

Still, the recent new highs have not broadened participation of all stocks.

Market breadth-the number of issues advancing versus those declining-has remained relatively weak, with stocks reaching new highs also showing a downward trend. While earnings didn’t disappoint in the second quarter,their growth was a rather tepid 4% year-over-year. And, as AlanGreenspan mentioned in Congressional testimony last month, the anticipated slowing economy represents a risk to stock prices to the extent that analysts are too optimistic in earnings expectations.

This great bull market is intact, driven by the favorable investment environment of moderate growth, low inflation, and low interest rates. Inthe short term, however, we view the market as limited in upside potential. For stock prices to move appreciably higher, we believe we needto see earnings growth accelerate, which will be challenging in a slowing economy. A period of market volatility may be a risk in the short term; butit should not discourage investors with a long-term horizon.

(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc.)

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