Domestic markets continue to be strongly influenced by the performance ofthe US economy. A strong Dow still pulls the ISEQ and FT-SE in its wake

Mr Dan O'Donovan, investment director for New Ireland, says that the fundamental supports in the US economy of low-inflation, low-interest rates and better-than expected corporate earnings are keeping the markets sound.

He sees a shift in the traditional pattern on saving funds, not just in Ireland but worldwide. Investors are in for the long haul and investment funds are popular, offsetting the volatility introduced in the markets by speculators. He believes savers have learnt from experience of the 1970swhen depositing money into cash savings was common. "Fortunes were wrecked in the seventies by inflation. Historically people were more cautious about their investments."

"The feeling is that valuations are looking stretched at this stage and it is due some kind of correction. But it is probably no more than 5 to 10 per cent," says Mr John Clarke, head of research at Riada.

Perhaps they are taking the Federal Reserve chairman's optimistic spin on the US economy last week with a pinch of salt. The Financial Times pointed to Alan Greenspan's warning of last year that a financial bubble was in the making. "If Greenspan was wrong to be cautious last December, why can't he be wrong this time?" the writer asked.

HISTORICALLY October is not a good month for the stock market: October 1929 heralded the Great Depression, while October 1987 registered the biggest shockwave to international markets in recent memory.

The announcement of a record trade deficit in the US started a free-fall on the New York stock market, resulting in over 25 per cent being wiped off the value of the New York stock exchange. Over £500 million was wiped off the value of Irish shares on Black Monday alone. But with a strong US economy combined with low inflation and interest rates, nobody is predicting doom for October 1997. Nevertheless, with the Dow Jones, FTSE and ISEQ indexes at all time highs, a ripple of uncertainty has run through market analysts as to if, and when, there will be a downturn. Analysts agree that domestic markets are almost wholly US driven. Mr Dan O'Donovan, investment director for New Ireland, says that the fundamental supports in the US economy of low-inflation, low-interest rates and better-than-expected corporate earnings are keeping the markets sound.

"You have an interesting debate on what is going on. If you get a fall off in a market of 10 to 15 per cent, does that turn into a complete rout? It is most unlikely to, given the fact that inflation is so low and corporate earnings are so good," he says.

Some financial institutions have read the market incorrectly in selling their stock prematurely. "A lot of people have made the play that we are in for a big fall off. I think they have created a bit of a problem for themselves because they are looking for an opportunity to buy back what they have sold," he says. He sees a shift in the traditional pattern on saving funds, not just in Ireland but worldwide. Investors are in for the long haul and investment funds are popular, offsetting the volatility introduced in the markets by speculators. He believes savers have learnt from experience of the 1970swhen depositing money into cash savings was common. "Fortunes were wrecked in the seventies by inflation. Historically people were more cautious about their investments.

Demographic shifts have also made for greater liquidity: more middle-aged people means more savings locked into long-term investments. "The same forces are driving the US. In the US they are holding less money on deposit," says Mr O'Donovan.

A fortnight ago the Dow Jones went over 8000 for the first time and last week it breached 8100 before settling back. In tandem, the ISEQ has also been breaking new ground. In spite of a prediction in May from Riada Stockbrokers that the Dublin market would at best make the 3200 mark by year's end, it has reached 3600 in recent weeks. Brokers see some sort of correction in valuations as inevitable.

"The feeling is that valuations are looking stretched at this stage and it is due some kind of correction. But it is probably no more than 5 to 10 per cent," says Mr John Clarke, head of research at Riada.

He says a lot has happened in the past three months to boost the indexes. Strong performances in the home financial market has echoed the international ones. "There is no question that things are going to fall apart. Growth is strong but it is at management levels," he says.

In the Irish context he feels that the next shift in interest rates can only be upwards, but there is no indication that this is imminent. "We are probably at the at the bottom of the interest rates cycle. The likelihood is that the next move will be up, but it will not be dramatic," he says.

Mr John Lawrie of Scottish Provident agrees that the market is beginning to look "stretched", but he pointed out that valuations are not as high as they were in 1987.

"These things cannot go on forever, but I cannot be sure that it will end in 1997. In terms of multiples of earnings or dividend yields, markets internationally are looking relatively expensive," he says.

He notes that the number of bond deals were less than what they were at previous peaks. "It could be that these will justify generally higher valuations," he says.

NCB sees the trend continuing upwards for the moment. "There is a greater degree of risk now than there has been for some time. But the general macro environment worldwide would still favour equities," says broker, Mr John Conroy. Mr David Lowe of Goodbody notes that a degree of caution among investors by definition makes a correction less likely. "We would find, among a lot of individual investors, a great deal of caution. There is no sign that individual investors are chasing into the market," he said.

Perhaps they are taking the Federal Reserve chairman's optimistic spin on the US economy last week with a pinch of salt. The Financial Times pointed to Alan Greenspan's warning of last year that a financial bubble was in the making. "If Greenspan was wrong to be cautious last December, why can't he be wrong this time?" the writer asked.