Dow Hits Record as Germany Cuts Rates : Dow Jones’ Surge May Herald a Return to Healthy Economic Growth Worldwide
Wall Street staged the equivalent of a rugby pile-on Thursday, sending the Dow Jones industrial average to a record and reigniting talk that a stunning new bull run is at hand.
Spurred in part by interest rate cuts in Germany and Japan, the Dow shot up 42.95 points to 3,416.74, finally surpassing the old peak of 3,413.21 set last June 1.
While most broader market indexes have hit a string of new highs since fall, the Dow had lagged badly--until Wednesday, when it rocketed 45 points, setting the stage for a buying panic Thursday.
Why the sudden attraction of aging blue chips? In part, investors and traders are simply looking for new names to buy, after having chased up prices of many smaller stocks through 1992.
But the market’s super bulls believe that the action of the Dow stocks reflects much more than mere bargain hunting. Because the Dow companies are multinational businesses, the stocks’ advance may be foreshadowing a return to healthy economic growth worldwide--for the first time since the late-1980s.
“I see a huge economic boom coming globally,” says Don Wolanchuck, a respected market newsletter writer in Detroit. Traditionally, he notes, “the stock market has told us well in advance what was going to occur” in the economy. This time is no different, he argues.
Indeed, the global-growth bulls make a persuasive case. The U.S. economy is unquestionably on track, even though job growth is lagging. And though Britain, Germany and Japan still ail, another round of interest rate cuts in those countries over the last week--and the virtual certainty of more cuts ahead, especially in Germany--are setting the stage for recovery by early 1994 at the latest.
The environment, in fact, is very reminiscent of the backdrop that produced the huge stock market rally of 1986-87: Inflation and interest rates are under control, and the world economy seems to have nowhere to go but up.
Between January, 1986, and the market peak in August, 1987, the Dow zoomed from 1,500 to 2,722, an extraordinary rise of 81%.
The bears, of course, argue that any talk of exponential market gains from this point is ludicrous. The Dow has already rallied 42% from just under 2,400 in fall of 1990, they say. And don’t forget that stock prices are bumping up against historically high price-to-earnings ratios.
What’s more, the doubters contend that U.S. interest rates will eventually rise with the stronger economy. When that happens, money will stop flowing to stocks, the bears insist.
But while the interest-rate argument is potent, it is seriously flawed, says Norman Yu, a Newport Beach-based money manager and also a super bull.
“Interest rates can have a short-term impact on the market, but in the long run they have nothing to do with stock prices,” Yu says. He notes that in 1987, rates began to rise early in the year as the economy boomed, yet stocks soared just the same.
Rather than worry about rates, Yu looks at the earnings prospects of individual companies and the investing public’s overall appetite for stocks. On either count, he says, only fools would bet against the stock market in 1993.
The pent-up demand for stocks is best measured by the huge trading volume that accompanied the Dow record this week, Yu says. An old Wall Street credo holds that volume is the weapon of the bull. Or, as Yu puts it, “When we see this kind of volume, it shows that the sellers in the market aren’t able to mount any great offensive against stocks.”
Robert Nurock, a veteran market analyst who plies his trade in Paoli, Pa., says the current bull run resembles the 1986-87 period in another important respect: “So many investors are groping at any straw that offers a reason why the market can’t go higher,” he says. Instead of feeling good about the market after two moneymaking years, most people are nervous and doubtful.
The latest poll of independent investment advisers nationwide by Investors Intelligence newsletter, for example, shows 36% bearish and 23.4% expecting a near-term decline in the market. Only 40.6% of the advisers are outright bullish.
All that said, any comparison with 1987 would be incomplete without a reminder of what followed late that year--the worst market crash since 1929.
Is that what we’re leading up to? Maybe, say the bulls. More likely, they suggest, the next bear market will be more traditional, meaning slow and painful. But that’s a concern for some other time--not 1993, and maybe not ’94, the super bulls say. In a growing economy with low inflation, low interest rates and mountains of cash around, the bear’s shadow simply doesn’t appear, they argue.
There will certainly be pullbacks along the way, the bulls admit. Smaller stocks, for example, are cooling off now. But when pullbacks occur--especially in the stocks poised to benefit most from a growing economy--that’s the time to buy those issues heavily, say Nurock and others. “There’s just so much disbelief that the market can go higher,” Nurock says. Long-term, that’s an invitation to a bear roast.
‘92’s Stock Stars Still In Charge
The stocks powering the market higher so far this year are mostly the same issues that led last year’s rally--industrial, technology, transportation and financial issues that would have the most to gain from a stronger economy.
Change in avg. stock: Industry group 1992 ’93-to-date Machine tools +24.3% +17.9% Autos +42.1% +17.5% Semiconductors +63.3% +15.8% Hotels/motels +38.7% +15.6% Major banks (non-N.Y.C.) +38.5% +12.1% Steel +29.5% +12.0% Defense electronics +0.9% +11.2% Multi-line insurance +11.5% +11.0% Computer software +18.0% +10.5% Transportation +38.6% +10.1% S&P; 500 index +4.5% +3.2%
‘93 data through Wednesday. Source: Smith Barney, Harris Upham & Co., using S&P; indexes