If cycles of the stock market are best compared to four-footed beasts, then the market of 1984 was surely a mule.
The market planted its hooves last January and wouldn't budge more than a few steps backward or forward for 11 months, despite the goadings of strong economic growth in the first half and falling interest rates in the second.
Its stubborn ways pushed individual investors to the sidelines and drove many institutional money managers to the bond market or to stocks that were considered hopeless plodders during the bull market of 1982 and 1983. The market punished the big brokerage houses and high-technology firms, filled the coffers of the money market funds and made fools of those who predicted that the landslide reelection of a conservative President would trigger a market stampede.
It forced many companies to go deeper into debt, rather than sell shares, to raise capital.
Only in the year's waning days did the market show some spark--rising nearly 35 points on Dec. 18 to 1211.57--as it became clear that the Federal Reserve Board was intent on stimulating the economy with a further drop in interest rates. But even that bit of excitement proved brief as the Dow Jones industrial index followed up with a listless performance, ending the year at the same 1211.57 level.
The professional Wall Street watchers dubbed it "the year of frustration" and "the year of comeuppance" that followed the giddy moneymaking of 1982 and early 1983. The market's up-and-down ride may be the worst of all possible worlds, since a consistent down market can be played for a profit, some complained.
Its recalcitrance in the face of economic growth, low inflation and falling interest rates "surprised a lot of people," said Monte Gordon, market analyst for Dreyfus Management in New York. "You have to conclude that the market was troubled by the prospect of a federal deficit and a trade deficit that was going to steal economic growth."
Adding to its jitters recently has been the Treasury Department's "flat tax" proposal, which has threatened to deprive businesses of tax breaks that have grown dear to their hearts.
The Dow Jones average of 30 industrial stocks reached its yearly high Jan. 6, at 1,286. The closely watched average then traced a desultory path that was interrupted briefly by an August rally that lifted the index 87 points between Aug. 1 and Aug. 3.
Its closing level represented a decrease for the year of 3.7%, compared to an increase of 20% recorded in 1983; 1984 was thus the first year since 1960 that the return to power of the incumbent political party did not touch off a major rally.
The crab walk of the Dow index, which best mirrors the movements of stocks of large industrial companies, conceals the depth of the decline of stocks of many smaller companies.
The average return of stocks on the New York Stock Exchange, including price appreciation and dividends, came to 0.5% in 1984--the lowest increase in 10 years, said Norman G. Fosback of the Institute for Econometric Research, a private investment advisory firm in Fort Lauderdale, Fla. He said the figure may provide the most accurate portrait of how the average individual investor fared in 1984, since the exchange's listings encompass companies of varying sizes.
"Since the average dividend was up about 3.5%, you can see that the average price was actually down a little bit," he said.
Stayed on Sidelines
It is clear that many individual investors who were frightened from the market in the latter half of 1983 kept their money on the sidelines through 1984. Trades of 900 shares or less--those presumed to be made mostly by individual investors--accounted for about 11% of the total on the New York Stock Exchange in October, notes Perrin Long, market watcher with Lipper Analytical Services in New York.
At the same time in 1983, the figure was 13.4%, and in 1982 such small-lot trades accounted for almost 17% of total volume, he points out.
Brave investors who stayed in the market last year may have done worse than average if they bet on the high-technology stocks whose prices during the 1982-83 market had soared to 200 times their earnings per share.
An index of technology stocks formulated by the California Technology Stock Letter, a San Francisco advisory firm, declined 25% for the year, while a technology-stock index of the investment house of Hambrecht & Quist Inc. fell about 30%.
"Investors feel they've been once burned and are now wary," said Long. "You won't see their values up there for some time."
Among the year's high-tech casualties are the shares of computer maker Convergent Technologies Inc., which is down to $6 from a high of $40.75, and of disk drive manufacturer Seagate Technology Inc., which has fallen to $5 from a high of $22.
The market's cool reception to such shares also froze the market for first-time stock issues, from technology and non-technology companies alike. The number of initial public offerings declined to 520, at a value of $4 billion, from 891 offerings with a value of $13 billion in 1983, said Fosback.
The volume of initial public offerings declined steadily as the year progressed, from 174 in the first quarter to 92 in the fourth.
Yet it is possible to overstate the size of the decline. The year ranked second, after 1983, in the number of initial public offerings and the amount of capital they raised, according to Fosback.
Most of these first-time offerings came from companies in businesses less affected by economic cycles, such as El Torito, the Irvine-based restaurant chain that was partially spun off by W. R. Grace & Co., Fosback said.
But some high-technology companies also braved the market to go public, including the microcomputer parts maker Micron Technology, which sold 2.1 million shares in June at $14 apiece.
The stagnating market had a clear effect on the desire of public companies to raise additional capital.
Net proceeds from common stock offerings fell 75% through Dec. 10, compared to the same period of 1983, to a value of $8.7 billion, according to New York's Securities Data Co.
Net proceeds from issues of preferred stock fell off 50%, while the value of convertible debt offerings--that is, debt that can be converted into stock--was down about 33%, the company said. The value of straight debt, meanwhile, rose 36% to $57.4 billion, according to Securities Data.
The stock market's year is also reflected in the performance of mutual funds. Through mid-December, the average return of mutual funds that were invested in a broad range of stocks was down 5.2% from 1983, said Michael Lipper of Lipper Analytical Services.
The best performing funds were those that put their money in such fixed-income investments as bonds. Their total returns--interest plus price gains--averaged almost 10% for the year, Lipper said.
Investors' queasiness about the stock market showed up also in the growth of money market funds, which have done particularly well in the last quarter. The funds assets' exceeded $200 billion by the middle of the month, up from $170 billion in early September, said William E. Donoghue, publisher of Donoghue's Money Fund Report.
He said the move was due largely to the public's consternation over the future course of the stock market. "People decided it was more fun to watch a boxing match from the sidelines," Donoghue said.
Analysts say some of the best performers of the year have been large and established firms from such non-cyclical sectors as the food and beverage industries, container makers, toy companies and utilities.
Michael Metz, market watcher at Oppenheimer & Co. in New York, describes the clamor for these shares as a "flight to quality."
"There was something about a dull, solid company that people found irresistible in 1984," he said.
Perhaps leading the underachievers were the high-technology stocks, which were bombarded not only by the market's overreaction to its earlier euphoria, but also by a widespread perception that International Business Machines Corp. plans to give no quarter in plans to dominate the computer hardware and software markets.
For the major brokerages, the market's slumber meant thousands of layoffs, depressed earnings and falling prices for their own shares.
Also among the hard-hit stocks were many in such cyclical business sectors as durable goods, investments, mobile homes, steel, aluminum and copper.
Some market analysts have gained no new confidence in the market with the approach of 1985. Even with declining interest rates and the prospect of a year of low inflation "the conditions just aren't there for a sustained rally," said Dreyfus' Gordon.
Oppenheimer's Metz says he believes the conservative strategy of choosing slow-growing firms with long track records of growth may be the best strategy, at least for the early part of 1985.
Fosback is recommending that clients accumulate stocks that have been long out of favor in preparation for a quick upturn in the market. He likes discount and regional stock brokerages.
He's also predicting a return of the high-technology stocks. "This is the information age," Fosback said. "They've got to come back sooner or later."
1984 Dow Jones 30 Industrials Open . . . 1258.64 High . . . 1286.64 Low . . . 1086.57 Close. . . 1211.57