History Says the Buying Frenzy Is Likely to Return

Wall Street’s buying panic finally cooled on Tuesday. But a look at other such panics of the 1980s suggests the hysteria will be back, and soon.

Following Monday’s 71.54-point jump in the Dow Jones industrial average, profit-takers stepped in Tuesday and knocked the Dow off 27.48 points to 2,874.75--the biggest point loss since the Gulf War rally came to life on Jan. 17.

Many investors have been watching this straight-up rally with disbelief. And now, with the Dow up 15% from Jan. 16 and up 22% from the bear-market low last October, there is a widespread feeling that stocks have rocketed too far, too fast.

But the current panic is less than one month old. The 1980s taught that buying panics usually go on for many months. There were four major periods of buying hysteria in the 1980s that confounded bulls and bears alike:

* From August, 1982, to June, 1983, the Dow soared to 1,250 from 777, or 61% over 10 months.

* From September, 1985, to March, 1986, the Dow rose to 1,800 from 1,300, or 38% in 6 months.

* From January, 1987, to August, 1987, the Dow rocketed to 2,700 from 2,000, or 35% in 8 months.

* From April, 1989, to October, 1989, the Dow jumped to 2,790 from 2,300, or 21% in 6 months.

During each of those rallies, the market was characterized by repeated mad rushes into stocks--exactly like what’s been occurring since Jan. 16. People couldn’t believe what was happening, but it happened anyway.

So here we are, less than one month into it, and up 15% on the Dow. Yet the shortest of the 1980s panics lasted about six months. The smallest gain of the four rallies was the 21% rise during the 1989 panic.

For comparison purposes, why not measure the current rally back to October of last year, when the Dow bottomed? Because from October to January, the Dow (and the broader market) ratcheted higher but there clearly was no buying panic. If you want to compare this rally to similar periods, only the four panics listed above match up.

Of course, that doesn’t automatically mean this rally will go on for another five months, or that the Dow will be up a minimum of 21% before it’s over.

But the duration of those 1980s buying panics shows that when the market gets a head of steam going, it almost always lasts far longer than what we’ve seen so far.

For those investors who want to wait for a pullback to get on board, the four panics of the 1980s suggest you will get an opportunity--but you won’t get a really sharp drop in stock prices before the rally resumes.

During each of the 1980s buying panics, there was a midway point at which the rally consolidated for a brief period before rocketing again. The accompanying chart shows the midway points and how much the Dow was up at each of those points.

The 1982-83 buying panic, for example, stalled temporarily at the 1,050 mark on the Dow, a 35% gain from the start of the rally. The 1987 panic was tripped at Dow 2,400, a 20% rise from the start of the rally.

Prices pulled back during each of the four consolidations. But in each case, the pullback was never more than 10% before the rally resumed--and more panic buying ensued.

Why suppose that the current rally bears any resemblance to the 1980s panics? The first three, after all, occurred within the context of a bona fide bull market. Some analysts insist that the current rally is nothing more than a bear-market rally.

They may be right. But whether you call it a bear-market rally or a new bull market, the fact remains that this surge has extremely powerful momentum.

And once a rally gets going with this kind of force, history shows that it feeds on itself. Investors and traders on the sidelines--and there still are many today--become convinced that if they don’t get aboard, they will regret it a month from now.

So pullbacks remain modest, because a steady stream of new money is always ready to come in.

There’s another factor worth mentioning here. When investors consider whether to jump into the rally or opt for some other place for their money, they look at bonds and at money-market accounts as alternatives. At the pullback points of the four 1980s buying panics, investors who considered bonds and money-market rates (such as on Treasury bills) had much more reason to pick those investments over stocks, because bond and money-market yields generally were much higher than they are now, as the chart above shows. Yet stocks still won out.

So despite the continuing recession, depressed corporate profits and a slew of other bad news, as long as interest rates stay down--or better, if they continue falling--the stock market’s momentum may be very hard to kill.

HOW LONG CAN HYSTERIA LAST? There have been four sustained market rallies since 1982 that were marked by panic buying of stocks. In all four cases, the market paused briefly after an initial surge straight up, then took off again. Here’s what the market looked like at the midway points.

Hysteria Dow gain 30-yr. 3-mo. midway point from bottom T-bond T-bill Nov., 1982 +35% 10.5% 8.2% Dec., 1985 +19% 9.8% 7.0% April, 1987 +20% 8.5% 6.0% June, 1989 +9.5% 8.3% 9.0% Current +15%* 8.0% 5.9%

* measured from Jan. 16 close of 2,508.91

Source: Standard & Poor’s Corp., Shearson Lehman Bros.