Prudent private investors will surely conclude that the risks in Wall Street are now much more on the upside than they are on the downside

INVESTMENTS

ALL bull markets, goes the old stock market adage, must climb a wall of worry. To continue rising, the market must be able to shrug off bad news and the fears of those who worry there are more gloomy tidings still to come. For anyone interested in investment, the behaviour of Wall Street over the past eight months has been a classic case of this phenomenon in action.

In less bullish times, it is easy to imagine how the Mexican devaluation crisis, the Japanese earthquake and the Barings crash, to name three recent dramas, could have prompted the market to fall back.

Yet all three events have come and gone without seemingly having any lasting impact on Wall Street's relentless rise. Since last November, the American market has risen 21 per cent and again this week touched a new all-time high. As so often happens, Wall Street's lead has been followed, with a lag, by London and several other world markets. (While the Footsie index bounces on towards its all-time high reached in February last year, only Japan among the biggest markets remains unmoved.)

The time to start really worrying about markets, however, is not when they are worrying, but when they stop. When bullishness becomes the norm, it means, by definition, that the market is at or near the top of the current cycle. There can be no more buyers still to come in. Is that the point we have reached with Wall Street after its current powerful run?

It is certainly beginning to look that way. A number of traditional indicators are starting to flash clear warnings signs. Most conspicuous of all is that the dividend yield on the US markets has fallen well below 3 per cent, a stoically low level. A yield below 3 per cent marked the top of the market in both 1962 and 1971, and was also the level that was seen before the two great market crashes in 1929 and 1987.

Mutual funds' holding of cash, another normally telling indicator, has also fallen to historically low levels. Only 7 per cent of their portfolios are now cash, which implies that they are fully invested and that there will be a fresh surge of buying from retail investors to carry the market higher in the immediate future.

Just as striking is the way consensus opinion on Wall Street has come round to the view that the current levels of the market can be rationalised on the basis of underlying economic trends. In contrast to the position even a few months ago, the near-unanimous view among forecasters now seems to be that the US economy is poised to achieve the much-vaunted "soft landing" after last year's frantic growth, without flipping back into a fresh recession.

That, in theory, should be good for the markets. The Federal Reserve, the American central bank, in public at least, is certainly adopting a notably chirpy line. The chairman, Alan Greenspan, said this week that he saw nothing alarming in any of the recent economic data, which the markets have taken to mean as "no more interest rate rises".

And whereas in January most economists were talking gloomily about a series of interest rate rises being necessary through the course of this year, more than 80 per cent in all the most recent surveys have said they now believe no more rate increases will be necessary.

But this does not mean that the soft landing is necessarily what will now occur. Disconcerting as it may be to investors, forecasting short- term movements in the stock market or the economy simply does not work.

Forecasters make forecasts, as the economist JK Galbraith once remarked, not because they know what will happen, but because they are paid to be asked. The consensus opinion, unfortunately, tells us nothing of real value about what will happen, only what majority opinion currently thinks may occur. That knowledge, however, is still valuable in its own right. What seems to be happening on Wall Street now is that many temperamentally bearish professional investors have come to the conclusion that they have no choice but to put aside their worries and ride the current bull market while it lasts. Most fund managers after all are judged by their performance against the market as a whole, and cannot afford to be out of line for too long.

Where does that leave the market now? Prudent private investors will surely come to the conclusion that the risks in Wall Street are now much more on the upside than on the downside.

There must be a correction soon. This column's hunch, for what it's worth, is that the current run has not quite yet reached its peak, but it won't be long.