The stock market's sprint toward the historic 10,000 mark on the Dow Jones industrial average has prompted new warnings from a few economists that shares are overvalued.
"The market is priced for perfection, almost with the notion of perpetual prosperity," said Edward Yardeni, chief economist at Deutsche Bank Securities in New York.
The blue chip Dow index surged past 9,900 during Thursday's trading. Bank stocks have also been on a strong upward track since fears of higher interest rates faded 10 days ago on a favorable report about wage inflation.
Mr. Yardeni noted that a stock valuation model published in July 1997 by the Federal Reserve shows stocks now about 30% overpriced-the highest such overrun since just before the October 1987 market crash.
In September 1987, the overvaluation factor was a remarkable 34%. Stocks were 26% overvalued last summer before sharp corrections in August and September, then rebounded to new highs.
The penchant of investors for quickly discounting bad news and returning to the stock market for buying opportunities, apparently with unblinking confidence in the U.S. economy, has caught the attention of Mr. Yardeni and others.
"After recovering from the bad news about Asia, the credit crunch of last summer, and Brazil's recent problems, the market has simply gotten used to the idea that bad news is good news, unless it happens at home in the U.S.A.," he said.
"Times are troubled overseas," Mr. Yardeni said, "and it seems to have created the view that the U.S. is the only place where one can really make money-in what (Fed Chairman) Alan Greenspan has referred to as an oasis of prosperity."
No one is predicting another market crash, but the view is that the current environment is not sustainable indefinitely.
The market is currently characterized by "stock valuations to tell your grandchildren about," said David A. Levy, director of forecasting at the Levy Economics Institute of Bard College in Annandale, N.Y.
"Whether the U.S. economy appears either too strong or too weak," he said, "the bloated and fragile stock market will have to dodge bullets in the months ahead."
But market players appear willing to duck almost any fusillade and keep coming back.
Economist and money manager A. Gary Shilling, who heads his own firm in Springfield, N.J., puts it this way:
"Individual investors are so convinced that a bear market is impossible and that declines are great buying opportunities that it will take a series of setbacks followed by disappointing rallies, followed by more selloffs."
Mr. Yardeni, who said he thinks the market may move higher until year- 2000 computer problems begin looming in the second half of the year, pointed out that overvaluation is typically corrected by falling interest rates, rising earnings expectations, or "the old-fashioned way" - a decline in stock prices.
He acknowledged that the market could be "saying in its own way" that this winter's rise in bond yields, spurred byconcerns about a revival of inflation, was not justified and that "the overvaluation problem will be cured with lower yields."
But as Mr. Yardeni sees it, "To get from here to there requires a slower economy along with lower inflation, and I think any lower bond yields would be offset by diminished earnings expectations."