Does History Hold Clues to Wall St.'s Record Rallies?
The higher the stock market climbs, Wall Street cranes its collective neck even further and asks that multibillion-dollar question: Where’s the top, and how will we know it when we see it?
Already, the record-setting performance of the Dow Jones industrial index--up another 7.55 points to a new high of 2,852.23 on Tuesday--is sending analysts back to the history books to search for comparable market rallies.
Is this bull run like the 1987 rally, the last wildly speculative surge before the end? Or is it more like 1982, when the bull was born? Or could this be 1972 revisited, when investors abandoned all caution and rode a select list of growth stocks to the moon?
Maybe it’s just wishful thinking, but almost no one on Wall Street wants to admit that there are any similarities between now and August, 1987, when the market last peaked. In those days, panic buying fits by institutions were commonplace as the market rocketed day after day.
“I sense no panic today,” says Jerome Hinkle, a veteran trader at Sanford C. Bernstein & Co. Outside of the Dow’s 63-point surge May 11, Hinkle says, many institutional investors have remained cautious. He contends that the rallies Monday and Tuesday saw relatively little institutional buying and that computerized program trading--and “short covering” by investors who’d bet on a market decline--have been responsible for much of the market’s heat of late.
Likewise, individual investors aren’t showing many symptoms of the get-me-in-at-any-price syndrome, brokers say. “Business has been very good, but we don’t have a lot of unsolicited calls coming in from investors,” said Lynn Reitnouer, partner at Crowell, Weedon & Co. in Los Angeles. In 1987, the unsolicited buyers came out of the woodwork, he said.
The attitude of many individuals, Reitnouer said, is that “they’re still waiting for some gigantic crack in the market--then they’ll come in.”
Of course, there’s no question that many big investors have, in fact, been buying stocks at a good clip over the past three weeks, helping lift the Dow by 200 points. If you’re a fund manager who has kept cash reserves at 20% of your total portfolio, you’d have a tough time explaining that to clients who expect you to be making money for them in this rally. You’ve got to put some of that cash back to work.
The New York Stock Exchange average daily volume figures show a healthy rise in activity as more investors have come in from the sidelines. But 200-million-share days still are the exception rather than the rule, unlike in 1987.
One major reason why volume remains tame is that foreign money isn’t flowing into U.S. stocks the way it did in 1987, says Ron Ognar, who runs the Kemper Growth stock fund in Chicago. “Foreign investors were really pushing our market up then, and U.S. investors were chasing them,” he notes. As the Dow soared to 2,750 from 2,100 that year, hardly a market news story was written that didn’t have some reference to foreign money.
In the current rally, foreign money is a footnote rather than a chapter, traders agree.
Add it all up, and the apparent absence of excessive bullishness suggests that the market has only begun to draw the many unbelievers into the game, analysts argue. So long as interest rates remain stable and investors continue to lose their worries of recession, the now and future allure of stocks feeds on itself, the bulls say. “There are still too many people who have been out of the market,” says Peter Da Puzzo, head of over-the-counter stock trading at Shearson Lehman Hutton.
Rather than 1987, some Wall Streeters see today’s market mimicking one of two other periods--the early 1980s or the early 1970s:
* In the 1982-83 period, investors suddenly awakened to opportunities in a broad cross-section of the market--blue chips, medium-size companies and small companies. While the Dow got much of the publicity as the market surged, many smaller stocks were actually far better performers.
The same thing is happening now, says William Patternotte, research chief at brokerage Alex. Brown & Sons in Baltimore. “Interest in the market has been very narrow and now is in the process of broadening,” he said. Some small stocks, particularly those in high-technology businesses, have been stellar issues this year after lagging the blue-chip Dow for many years.
Yet the small stocks still have a lot of catching up to do before they’re fairly valued, Patternotte contends. “What we forget is that the average stock is still down a long way from its (1987) high,” despite the Dow’s record heights, he said.
* The argument for a repeat of the early 1970s is that now, as then, the market is truly rabid only for the most exciting “growth” stocks. Show Wall Street a company whose earnings are expected to grow 15% to 25% or better annually for the next few years, and you can expect a stampede. Microsoft, Boeing and Gap Inc. are three good examples of stocks that seemingly everyone wants to own again.
In the early 1970s, Wall Street had the Nifty Fifty--a group of stocks that were thought to be the premier growth companies of their day. Included in that list were names such as Avon, Xerox and Eastman Kodak. The stocks sold for 40, 50, even 60 times annual earnings per share at their peaks.
When that speculative binge ended in 1973-74, many of those stocks crashed, never to recover.
Is the current rush to selected growth stocks going to create a new Nifty Fifty? “I’d say there’s a very good possibility of that,” admits Laszlo Birinyi, head of Wall Street research firm Birinyi Associates. But he and other analysts note that growth stock price/earnings ratios of 20 to 30 today, based on 1990 earnings estimates, still are a far cry from those 1972 heights. And the average market P/E of about 15 is comfortably below the P/E peak of 21 in August, 1987.
So there’s certainly a case to be made that growth stocks deserve the attention they’re getting, and more. What you can’t assume this time that every stock is a safe bet until the P/E hits 50. History is educational, but after all, it rarely repeats exactly.
“There’s no question we’re in a growth stock market,” says Marshall Acuff, strategist at Smith Barney, Harris Upham & Co. “The only question is whether this market will go to its own extreme"--and whether anyone will recognize it when the time comes.
THE BUYERS RETURN
Average daily New York Stock Exchange trading volume finally has risen back to January levels--except now the buyers are in control, instead of the sellers.