This Bull Shows No Signs of Being Lassoed

Wall Street is set to close out January with nearly everything going right for stocks--to the continuing amazement of market bears who keep waiting for cataclysm.

The Dow Jones industrials finished Friday at a record 3,945.43, up 19.13 points on the day, after the government’s report that the economy in the fourth quarter grew at the fastest pace in six years.

The Dow’s gain was no fluke: Most broader market indexes also hit all-time highs Friday, virtually ensuring a strong finish for the month. The Dow is up 5.1% so far this month, the Standard & Poor’s 500-stock index is up 2.6% and the Nasdaq Stock Market’s composite index is up 2.5%.

A January gain is psychologically important for Wall Street, because historically the market’s trend for the year follows its trend in January. Since 1950, an up January for the S&P; 500 has presaged a full-year gain, and a down January has presaged a full-year decline, in 37 of 44 years--an 84% batting average.


But the market has far more than the “January barometer” going for it. Despite the best efforts of the bears to talk stocks down, the truth is that the fundamentals underlying this bull market remain exceedingly healthy:

* Corporate earnings are robust. Wall Street expected strong fourth-quarter profit reports to match the zooming economy, and so far the numbers look good. Ben Zacks, whose Chicago-based Zacks Investment Research tracks earnings, says 61% of reports received through last Monday matched or exceeded expectations. Thirty-nine percent were below expectations.

“The pattern is very similar to the previous couple of quarters,” Zacks says. Overall, Wall Street analysts expect operating earnings for the blue-chip S&P; 500 companies to rise 25% in the fourth quarter compared to a year earlier.

Because stock prices are ultimately determined entirely by underlying earnings, the fourth-quarter growth may go a long way toward keeping investors’ mood positive--especially as strong earnings lead to rising cash dividends that go directly into shareholders’ pockets. Indeed, the number of companies boosting dividends in 1993 was the highest since 1989, according to Standard & Poor’s Corp.


* The inflation outlook keeps getting better. The shocker in the fourth-quarter gross domestic product report Friday was that a key inflation indicator was far below expectations--while the economy’s growth, 5.9% annualized, was above expectations.

The GDP implicit price deflator, a broad-based measure of inflation, rose at a 1.3% annual pace in the fourth quarter, instead of the 3% rate many economists expected.

For a number of reasons, including weak oil prices and extreme competitive pressures in many industries, higher prices aren’t a part of the story in this rejuvenated economy. So long as that’s the case, Wall Street has little reason to fear that interest rates are poised to rise significantly.

More investors seemed to embrace that view late last week, as bond yields dropped and beaten-down bank and utility stocks roared to life. The banks and utilities are classic interest-rate-sensitive issues, which means investors sell them when rates are expected to rise and buy them when rates are falling or stable.

* Consumer confidence is surging. The bears need to face a simple fact: Outside of quake-rattled Southern California, people feel good about the economy. That’s also increasing their willingness to invest in stocks, which pumps more money into corporate America, which in turn increases the likelihood of business expansion and further economic growth.

“A dash of confidence can go a long way toward boosting growth,” notes John Lonski, economist at Moody’s Investors Service in New York.

Consumer confidence has ebbed and flowed over the past three years, of course. But Robert Barbera, economist at Lehman Bros. in New York, notes that the current jump in confidence is different in intensity: Consumers not only feel optimistic about the future, they also feel good about the present , according to a monthly consumer survey by the University of Michigan. That element had been missing since 1990, Barbera says.

What’s also different in this economic cycle is the mind-set of those confident consumers. They are spending more money, but they are also investing more. Stock mutual funds took in a record $14.5 billion in net new cash in December, a figure that is likely to be topped in January.


The aging baby-boomer population has its priorities straight, says William Dodge, investment strategist at Dean Witter Reynolds in New York. The need to save for retirement is taking precedence over spending on things such as clothing. Hence, stocks of clothing makers and retailers continue to be hammered, as they were in 1993.

Where the boomers are concentrating their spending is on big-ticket items such as cars, furniture and household appliances--necessary purchases that may have been deferred as concerns about job security overwhelmed Americans over the past three years.

As spending on big-ticket items soars, so do stocks of the beneficiaries of that demand, such as auto makers, machinery makers and truckers. (The trucks, after all, move the products.) And far from winding down, Dodge and other pros believe that this spending wave is only in its infancy.

All in all, we’ve got a healthy economy with low inflation and a powerful predilection on the public’s part for stocks.

The bears will say it’s a sure sign of a peak when so much appears to be going right for the market. But they’re underestimating the most important force of all: momentum. Until the glowing backdrop for stocks changes meaningfully, this bull market’s steady advance is unlikely to suffer anything more than brief interruptions.

January’s Leaders and Laggards

Wall Street has bet heavily in January on a continuing strong economy in 1994: Industrial stock groups have surged while traditionally “defensive” groups, such as utilities, have slumped. Here are the biggest winners and losers so far this year among 87 stock groups.



Group Avg. gain Pollution control +13.1% Truckers +12.7 Hospital management +11.5 Aluminum +11.1 Trucks/Truck parts +10.1 Bag, box makers +10.0 Machine tools +9.4 Chemicals +8.9 Autos +8.0 Semiconductors +7.5


Group Avg. drop Can, bottle makers -9.1% Oil, gas drillers -8.3 Specialty retail -5.0 Soft drinks -4.7 Broadcasters -4.5 Grocery chains -3.6 Gold mining -3.1 Clothing makers -3.0 Electric utilities -2.4 Diversified health care -2.4

Data through last Thursday

Source: Smith Barney Shearson, using S&P; indexes