A host of new regulations and protectionist policies in reaction to higher unemployment levels would clearly be inflationary, Interest rates should also not budge much. Since there is little demand for new capacity in the manufacturing sector, commercial real estate is overbuilt, and the cautious consumer is wary of debt. The only significant pressure for higher rates would come from a sizable increase in the deficit. The stock market has been quite volatile and is still somewhat overvalued, although less so than before. Improved earnings in a relatively flat market have brought valuations down.
Money continues to pour into the stock market as C.D.s mature and investors seek higher returns.
The supply of stock, increased by countless new issues, has more than matched the demand for stock and the market has shown only modest gains in the past 18 months. The result is a market where any individual company whose earnings do not meet analysts' expectations suffers an immediate and dramatic decline in price. It is also a market where any industry group can suddenly fall out of favor and experience a similar dramatic sell-off. Yet, the overall market maintains its valuation level. Investors are readily willing to abandon individual stocks and entire industry groups, but they are not yet ready to give up on the market as a whole.