The stock market continues to be buoyant in the face of what normally would be considered some pretty depressing news for stocks.
For example, yesterday's announcement by the government that consumer prices in April climbed at a double digit annual rate was followed by a strong 6.41 point advance in the Dow Jones industrial average.
The favored explanation by most market analysts was that investors had already discounted a large inflation increase in advance, and that when the figures finally came out they were not as horrendous as everyone expected.
And, while many economists are warning that the continuing climb in interest rates threatens to cut off the nation's economic recovery, many investors seem also to be shrugging nonchalantly at this prospect.
"People who are bullish on the market today are bullish because they can buy assets at a substantial discount from current value," comments Loeb Rhoades Hornblower Research Director Gary B. Helms.
"They are buying in spite of the assumption the economy will slow later this year or early next year, in spite of the belief that inflation will continue to be a problem, and in spite of the fairly wide assumption that interest rates will go higher," he adds.
Michael Metz, a vice president with Oppenheimer & Co., believes that "the market is willing to look beyond inflation and the rise in interest rates and is expecting that things will be getting worse in the medium-term."
A consensus, in fact, appears to be emerging that short-term interest rates, which have climbed fairly rapidly since the beginning of the year as a result of Federal Reserve tightening, may not be too far from their peaks and could top out in the third quarter of this year.
There may be a large element of wishful thinking in this growing view since a number of respected money market economists are forecasting a further sharp climb in interest rates for the rest of 1978 with no peak in sight before next year.
And if this indeed transpires, the market could be in for a sizeable setback. But for now investors seem willing to choose the brighter outlook.
Another important factor backstopping the market's advance since early April has been the large and available cash pools maintained by many large institutional investors.
In the first quarter ending March 31, bank trust departments were net sellers of stocks from their portfolios, according to reports filed with the Comptroller of the Currency.
It is unusual for the trust departments to ever be net sellers of equities since they are the recipients of a large and continual inflow of investments dollars, primarily from employe pension funds. But the fact underlines the inclination these institutions had for cash over stocks just before the explosive April rally began.
A large part of the April and May advance in turn was attributed to a buying "panic" by institutions who plunged back into the market, fearful of being caught on the sidelines with excessively large cash reserves at a time when the market was registering sizeable gains.
The cash position of many institutions, however, continues to be very large, say the analysts.
And they note that many of the trust departments and mutual funds appear to have missed the boat on the market's 100-point spring rally because they were skeptical it was for real.
The large new York City banks in particular have been the most reluctant to jump back into the market with both feet, while non-New York institutions have been more aggressive.
As a result, there remains plenty of buying power still available. And, by this view, many institutions that have not ploughed much of their cash positions back into equities can be expected to look favorably on any setback in stock prices as a purchasing opportunity.
"If the market holds at current levels for the next week or so, there will be a lot of pressure on money managers harboring a lot of cash to put it into the market, particularly as we get to the end of the second quarter," notes Newton Zinder, vice president and market analyst with E. F. Hutton & Co.
Zinder anticipates a possibly very strong market in the latter part of June as some fund managers try to dress up their portfolios prior to the end-of-the-quarter reporting period which is used as the basis for comparing the relative performance of institutional investors.
So in spite of predominantly gloomy forecasts on inflation and interest rates for the near term, the dynamics of this stock market seem to portend little risk on the downside, and the opportunity for some further price appreciation on the upside.