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April 19, 1999 01:00 AM

AS GOES JAPAN, SO GOES THE BULL MARKET

Mike Clowes
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    , Editorial Director

    How will the bull market end? If we can figure that out, we might be able to see it coming.

    Ken Safian, president of Safian Investment Research in White Plains, N.Y., and a veteran analyst who has been watching market trends since the '60s, has an intriguing scenario:

    The U.S. bull market will end with a Japanese recovery.

    That thesis flies in the face of some economists and others who are praying for a Japanese recovery to help pull Asia out of its near depression.

    Those hoping for a Japanese recovery expect a pickup in Japanese demand to stimulate the export-driven Asian economies. That, in turn should stimulate demand in those countries for U.S.-produced goods and services.

    How could that be bad for the U.S. economy?

    Mr. Safian's view: Commodity prices. A Japanese economic recovery would drive up demand for commodities, and thus push up commodity prices.

    That would push up the earnings of commodity companies.

    When cyclical company earnings begin to rise, the prices of their stocks, which have been beaten down by the companies' lack of pricing power, also will start to rise.

    In fact, cyclical stocks should begin to outperform growth stocks, and also the S&P 500 (where cyclicals are almost invisible), as savvy investors begin to pull out of the growth stocks that are heavily weighted in the index. The S&P 500, Mr. Safian said, is now really a growth index.

    That will drive the growth stock prices down and trigger a market correction. Most individual investors are unlikely to be able to switch to the cyclical stocks in a timely fashion, so they'll probably take a hit, and maybe pull out of the market, driving it lower.

    A lot of instititional clients of growth stock managers won't see it coming, or won't believe what they see until they've taken a hit, and they'll also pull some cash from the market for a time, licking their wounds while figuring out how to rebalance.

    The correction might be worsened by Japanese investors pulling out of the U.S. stock and bond markets to reinvest in their own market.

    The U.S. market correction in turn could curb people's appetites for spending because they will feel less wealthy, and a reduction in spending could trigger a recession.

    And a recession would further erode the support for the S&P 500 index and any stocks driven by consumer spending. In other words, there would be a recessionary spiral with the market and the economy feeding on each other.

    Judging by the market swoon in mid-March when the oil-producing nations announced they were cutting production to boost prices, Mr. Safian's view is a plausible scenario.

    But maybe, if Japan recovers slowly, we'll all have time to adjust.

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