Weighing the factors: As the recovery meets resistance investors look north for clues. (Market Movies).

This month's column examines the effects of recent developments that took place in both the U.S. and Mexican stock markets: the Dow Jones index reaching the 10,000 level once again, and Mexico obtaining the long-awaited investment grade from Standard & Poor's. I conclude that the U.S. stock markets will continue to be flat as a result of mixed signals on the economic front. The Bolsa has already discounted all the positive news and will thus be focused on the international developments and on upcoming quarterly results. This suggests that there could be a short-term adjustment in the local stock market.

U.S. CONSOLIDATION

As forecasted, U.S. stock markets suffered a significant adjustment from last January's peak levels. Investors were concerned about various issues, including high valuations, the expansive effect of Enron's accounting problems, and the sustainability of the economic recovery, among others. However, the Dow Jones had bounced back by mid-February in order to once again reach the 10,000 point mark. My main question at present is whether this rebound is sustainable, or if it is only some sort of short-term reaction that would lead to even lower levels.

My belief is that U.S. stock markets will continue to consolidate around current levels, given the mixed signals on the economic front. I expect the Dow Jones to trade within the 9,70010,000 range over the next few weeks.

On the one hand, most important economic indicators continue to improve. This includes the Consumer Confidence Index, retail sales excluding automobiles, orders for durable goods, unemployment, and both the business and wholesale inventories, among others. In addition, both producer and consumer prices remain under control.

On the other hand, we have some economic figures that show resistance. The first one is the University of Michigan's consumer confidence index, which in February deteriorated to 90.9 points, after three consecutive months of improvement. The second one is industrial production which has been falling continuously from October 2000 to January 2002--the weakness in industrial output has been dragging down the capacity utilization rate, which is at its lowest level in several years. The last one is the recovery in international oil prices, which could eventually generate higher inflation, if no one takes proper action (i.e. increase in OPEC's production).

MAKING THE GRADE

Standard & Poor's finally raised Mexico's debt rating to investment grade, after continuously mounting pressure from its two main competitors, Fitch and Moody's, which had done the same. However, Bolsa traders toned downed their enthusiasm for the Standard & Poor's decision after having already reacted positively to the previous upgrades from the other two.

The main implication of this series of upgrades is that there will be a reduction in the cost of new Mexican debt issues in international markets. In addition, Mexico will have access to global investment funds that require this rating. However, it is important to take into account that these investors are also looking for attractive valuations. As a result, I estimate that it will take some time for Mexico to capture more funds from this financial segment, especially if valuations look more compelling in other emerging countries.

Furthermore, many Bolsa investors have already switched their attention to the international arena (especially the U.S. economy), and upcoming quarterly results of local companies. Regarding these, we can expect lackluster operating performance reports due mainly to economic contraction. In this sense, the government's statistics institute (INEGI) announced a -1.9% drop for the last quarter in 2001. In my opinion, these factors suggest that the Bolsa 's IPC index will see more profit-taking in the near future.

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Martin Lara is a Mexico City-based independent financial analyst.