The US stock market is not as overvalued as a static comparison with previous

The US stock market is not as overvalued as a static comparison with previous bull markets would suggest, but it still looks overvalued.The UK economy has been travelling along the same path as the US, making more efficient use of labour, shifting the balance of advantage in favour of capital, and bringing inflation and budget deficits under control, with similar effects on the stock market. Share prices have risen to 25 times earnings, and dividends yields have dropped to 2.5 per cent - half the return on government bonds. In recent years the FT-SE index has underperformed the Dow Jones but it could have further to go before it peaks.European stock markets have performed strongly through the 1990s, helped by increasing liquidity and hopes of mergers in the single European market. But the behaviour of the Japanese market shows that nothing goes on for ever.

In the 1970s and 1980s, the Nikkei rose to dizzy heights because Japanese companies were growing on export earnings and investors were chasing capital gains and ignoring the negligible dividend yields.When the bubble burst investor confidence collapsed and shares looked ridiculously overvalued. It is still too soon to say that the Japanese market looks cheap.. UK STOCKS may advance this week, led by Bodycote International, Northern Leisure and other companies whose earnings depend on economic growth, on optimism over recovery in Asia and the UK. "If the economy does strengthen, and if Japan starts to show some signs of strength, then cyclical stocks are going to be more interesting," said Tony Hardy, manager at Church Commissioners. The FT-SE 100 index rose 0.8 per cent to 6,163.2 on Friday but fell 1.8 per cent for the week as investors sold Reuters, Telewest and other stocks whose gains this year were considered higher than justified by their earnings outlooks. Reuters lost 8.5 per cent on the week while Telewest closed down 10 per cent.

"We're getting to the end of the worst and looking forward to better growth in the year 2000," said Ken Forman, global strategist at Standard Life. "The UK market is offering good value and has a lot going for it."Companies active in Asia may be among leading gainers. "Forecasts about the extent of the Asian recession were exaggerated," said Werner Lykowsky at Helaba Investment. "Asian stock markets have recovered and so will their banks."Bonds may rise as reports on prices and economic growth bolster expectations that the Bank of England will lower interest rates again, perhaps as soon as next month.A report on retail prices, due on Tuesday, is likely to show prices excluding mortgage payments probably declined to 2.5 per cent last month from 2.6 per cent a year ago "The MPC targets inflation.

If there's downside risk the Bank of England is more likely to cut than not," said Jonathan Cunliffe, at Lombard Odier Asset Management.Bonds were little changed on Friday, with the benchmark yield at 4.43 per cent. Investors believe the UK is on track for 2.5 per cent or even lower inflation. "The trend is down," Mr Cunliffe said, forecasting underlying inflation could slip to 2 per cent by the end of 1999 "There's a fair chance [the bank will cut]", he said. A 4 per cent rise in the pound against the euro this year gives the central bank further cause to cut.Crude oil was close to a five-month high on Friday, ahead of meetings between Persian Gulf oil producers this weekend and an Opec meeting on Tuesday, where output cuts are expected to be ratified. Oil producers last week agreed to cut at least 2 million barrels of daily output. Oil prices in the past three weeks have surged more than 20 per cent.. MORGAN Stanley Dean Witter told investors IBM's stock could disappoint them.

Merrill Lynch defended Big Blue, saying it's still a good buy Morgan Stanley won Friday's battle of dueling analysts. IBM, slid 5 per cent to 168 9/16 after Morgan Stanley said the company's revenue from mainframe computers won't meet expectations because of price cuts. The slump in one of the Dow Jones's biggest stocks erased any hope the benchmark would finally close above 10,000 after crossing the milestone three times during the last four trading days. The conflicting outlooks and IBM's decline illustrate investors' concern that they're about to get bombarded with warnings from computer-related companies about slowing profits or sales growth. "People are having pre-reporting jitters for all technology [stocks] at this point," said Bob Finch, manager for Aeltus Investment Management. "The sense I have is that IBM is still one of the best value stocks in technology."For the week, the Dow Jones Industrial Average gained 0.3 per cent to 9,903.55, while the S&P 500 added 0.4 per cent to 1,299.29 and the Nasdaq rose 1.7 per cent. It's become a truism of the bull market rush to 10,000 on the Dow industrials that the gains have been concentrated in a relatively few stocks.The question is whether that "narrowness" really signals trouble for the market.