NEWS ANALYSIS : Powerful Stock Rally Continues, Baffling Many
For the U.S. stock market, Wednesday was like so many other days this year: another jump and another record high, in a powerful rally that has bewildered at least as many people as it has enriched.
The Dow Jones industrial average, the best-known market index, surged 44.27 points to a record 4,373.15, extending its year-to-date gain to a stunning 538 points, or 14%.
The catalyst for Wednesday’s market rise was further evidence that the economy is slowing, as the government reported a steep decline in its index of leading economic indicators. Long-term bond yields, in response, fell to 11-month lows, and that helped send stocks soaring.
Not since early 1991, when stocks were rocketing in the wake of the allied victory in the Persian Gulf War, has the market advanced this strongly in so short a period.
But unlike the 1991 rally--which seemed an appropriate response to war’s end--the 1995 bull market has been greeted with extraordinary disbelief on the part of many professional and amateur investors alike.
However optimistic investors may be about the so-called soft landing scenario for the economy--a slowing of growth to a sustainable pace, with the side benefit of modestly lower interest rates--stocks have already exceeded the levels many experts think is “fair” to pay.
Yet the market continues to climb, as the Dow topples 100-point marks with increasing ease.
It is a performance that Wall Street’s most bullish analysts contend is prophetic--a harbinger of a global economic expansion that may surprise nearly everyone with its duration.
For the bears, however, stocks’ streak is borderline lunacy. And there are plenty of bears.
An oft-cited weekly survey of more than 130 investment newsletter writers by Investors Intelligence of New Rochelle, N.Y., shows that only 40.7% of the advisers are bullish currently, while the rest expect either an outright bear market or a significant short-term pullback in stocks.
Normally in a bona fide bull market the percentage of optimistic advisers would be expected to top 50% or even 60% by now, says Michael Burke, analyst at Investors Intelligence. But the percentage of bulls has risen only modestly, from 35% on Jan. 1, even as stocks have leaped.
Suresh Bhirud, a Stamford, Conn.-based investment strategist, says he is continually fielding calls from Wall Street money managers who are shocked--and worried--by the almost nonstop pace of stocks’ gains this year.
“Every day, I have clients who say, ‘I’m going to raise some cash here, the market looks toppy,’ ” Bhirud says.
At the Chicago-based American Assn. of Individual Investors, a not-for-profit educational association for small investors, director John Markese finds that “a lot of investors are extremely worried” by the market’s streak. “People say, ‘It’s too high, I’m going to wait to buy,’ ” he says.
Indeed, U.S. stock mutual fund companies, while enjoying continuing inflows of cash this year from individual investors, generally say fund purchases are about half the peak levels of early 1994.
Still, the market rally continues, along the way shaking off such shocks as the dollar’s crash against the Japanese yen and the horrific terrorist bombing in Oklahoma.
Some Wall Streeters say stocks’ gains are occurring, in part, exactly because so many people are skeptical. In market parlance, it is often said that “bull markets climb a wall of worry”--meaning that as long as there are reasons for investors to be nervous, there will always be money on the sidelines that can bit-by-bit be enticed in, as one investor after another decides to abandon pessimism and join the rally.
Other investment pros, however, say this bull market is drawing strength from something much more fundamental: a global economic outlook that appears increasingly bright not just for 1995 but well into 1996 and perhaps 1997.
The most optimistic investors believe that the mid-1990s economy of the United States is directly comparable to the economy of the early- and mid-1960s--a period when inflation and interest rates were low, corporate earnings growth was strong and stock prices were high.
According to this view, the Federal Reserve Board’s doubling of short-term interest rates last year has achieved precisely what the Fed wanted: a slowdown in the economy that will leave growth at a more sustainable pace but not so slow that it results in sharply higher unemployment and a decline in corporate profitability.
While many investors may doubt that the Fed has accomplished this soft landing, Wall Street bulls point to the weakness in many economic statistics this year, the sustained decline in interest rates and the seeming lack of inflation pressures, and then juxtapose all of that with the surprisingly strong gains in first-quarter corporate profits.
“What we have is a stunning performance by the U.S. economy,” argues Allen Sinai, chief economist at Lehman Bros. in Boston. “And the rest of the world looks like it’s ready to follow.”
By heading off any potential overheating of the economy, the Fed has guaranteed a stretched-out economic expansion, adds investment strategist Bhirud. The stock market, he says, is sensing this and responding to it--even if many investors remain dubious.
What’s more, Bhirud and others say that this year’s dramatic rally in stocks should be viewed in context: The U.S. market had posted relatively modest price gains in 1992 and 1993, and last year many stocks tumbled as the Fed continually raised interest rates.
That sub-par market performance from 1992 through 1994--while corporate earnings rose steadily--has set the stage for overdue price gains, the bulls contend.
Yet for every gung-ho optimist on Wall Street, there are many more disbelievers. Some worry that the Fed’s interest rate hikes will cause a recession before the year is out--in other words, that the soft landing will become a hard landing.
Others fear that the economy will rev up again soon, causing inflation to rise and forcing another jump in interest rates.
And many market veterans, even if they believe in the soft-landing scenario, simply say that a Dow of nearly 4,400 already reflects the continuation of low interest rates and corporate earnings gains in 1995 and perhaps 1996 as well.
With the average U.S. industrial stock priced at about 15 times estimated 1995 earnings per share--not far below the high end of the historic range for that measure of valuation, typically 18 to 20--the market’s doubters say stocks have reached levels at which there is no room for error.
Glen King Parker, an investment adviser at the Institute for Econometric Research in Ft. Lauderdale, Fla., admits that he has been bearish for too long. But glowing projections that the economy and the stock market have entered a “new era,” he says, give him all the more reason to decline to buy into this bull market.
“In the past, reality has always caught up with these dreams that we’re entering a new era,” Parker warns. The market is overdue for a sharp selloff, he says.
The bulls, however, say the lesson of the mid-1960s was that stock prices can prove amazingly resilient in times of low inflation, moderate economic growth and subdued interest rates. If the mid-1990s are indeed repeating the mid-1960s, the surprise could be that any market setback in this year’s rally won’t last long--and will give way to even higher stock prices soon afterward, Bhirud and others say.
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Bullish Times on Wall Street
The Dow Jones industrial average has rocketed to record levels this year as the slowing economy has pushed interest rates on government bonds down from last year’s highs. Wall Street optimists believe that a continuation of modest growth and low inflation is the best possible environment for stocks.
Weekly Dow Jones closing price: Last week of each month, except the latest Wednesday close: 4,373.15 *
30-year U.S. Treasury bond yields, weekly close: Last week of each month, except the latest Wednesday close: 7.25% *
“I don’t see the overheating scenario. It’s not in the numbers.”
--Laura D’Andrea Tyson, President Clinton’s top economic aide, on prospects the economy will grow too fast and trigger inflation.
