Storm Watch : Looking to the Past, Some See Signs a Big Boom Is on the Way
Wall Street’s surprise 1995 rally, having already made fools of untold numbers of bearish investors, may be ready for a new phase: a mania that sends stock prices soaring to extraordinary levels.
“I think we’re at the edge of a speculative blow-off stage,” says Standard & Poor’s Corp.’s veteran market analyst Arnold Kaufman, speaking with equal parts wonder and caution.
If talk of a bigger market surge sounds outlandish--with the Dow Jones industrial average already up 14% this year--consider what happened in 1987.
Most investors remember 1987 as the year of the October market crash. But before the crash could occur, stocks had to be taken to extreme heights.
Between Jan. 1 and Aug. 25 of that year, the Dow rocketed a stunning 44%, from 1,895 to 2,722. It wasn’t a straight-up climb--the market sold off modestly in the spring--but the gain by the August peak certainly makes this year’s Dow rise look bush-league.
On Thursday, the market took a breather, with the Dow easing 13.49 points to 4,359.66 after soaring 44.27 points to record levels on Wednesday.
The bears seized on Thursday’s roller-coaster action, which saw the Dow up nearly 40 points early in the day before selling off, as a sign that the market is over-tired and primed for a pullback.
Wall Street faces a key test today, when the government reports on April employment. Both the bond market and the stock market are counting on data that reinforces the popular scenario of a slower, but not too slow, economy.
Yet if stocks are indeed in the early stage of a wild run-up, even a big gain or drop in joblessness that rocks the market would be a minor setback--the proverbial “buying opportunity” before share prices zoom again.
Why think the market may be entering a mania? The most fervent bulls see a convergence of highly favorable trends all pointing to a new stampede into stocks, or at least into enough stocks that key market indexes like the Dow and the Standard & Poor’s 500 will continue to rise.
Chief among those trends, of course, is the economy’s apparent slowdown from 1994’s torrid growth. The bullish thinking is that moderate growth will keep inflation restrained and allow interest rates to continue easing, allowing the economic expansion to stretch into 1996 and maybe beyond.
Give the economy more running room, the market’s champions say, and you extend the prospects of continued corporate earnings gains and thus the bull market.
In early-1987, as today, investors saw the potential for controlled interest rates and inflation, plus healthy corporate profits. Interestingly, that bull market, like this one, was already in its fifth year. Yet instead of growing more worried about a peak in stocks, investors found new reasons to justify pushing share prices higher.
Some analysts see another reason why this year’s market surge may be the start of a mania of sorts. As during the early 1960s, recent years have seen robust corporate earnings growth. But unlike the early-’60s, blue-chip stocks’ price gains between 1992 and 1994 failed to keep up with earnings gains.
The S&P; 500 index’s total return (price gain plus dividends), was 7.6% in 1992, 10.1% in 1993 and 1.3% last year. In contrast, operating earnings of the S&P; companies grew 11%, 15.6% and 15.1% in those years, respectively.
It may well be that the spectacular first-quarter earnings reported by many major companies this year have been a form of wake-up call for investors--an invitation to get on board as stocks play some long overdue catch-up.
But if there’s going to be a mania at this stage of the bull market, would all stocks necessarily have to be part of it? One school of thought suggests more of a repeat of the Wall Street experience of the early 1970s.
That was the era of the Nifty Fifty stocks, a group of high-quality growth companies whose earnings outlook was considered so stellar that the stocks were known as “one decision” issues: You bought and held.
Between 1970 and early 1973, those Nifty Fifty stocks such as Walt Disney, McDonald’s, Avon Products and Sony ran up to prices that were 50 to 100 times their underlying annual earnings per share.
It was a mania for a narrow group of stocks, but their incredible gains were enough to keep the broad market indexes moving ahead for more than two years.
This year, some market pros see a return to a new Nifty Fifty, stocks like Coca-Cola, Intel and Johnson & Johnson. They are bigger companies than most of the 1972 breed, and therefore their earnings growth rates are more modest. But the same force that drew investors to the premier growth stocks of 1972--a feeling that their prices didn’t reflect their earnings potential--is drawing buyers to this year’s growth-stock leaders.
Maybe the new Nifty Fifty won’t ever sell for 50 times earnings, say their fans. But buyers have been driving those stocks higher for four months, and most of them don’t yet even sell for 25 times earnings. To the bulls, the growth stock revival is far from over.
Of course, the ultimate problem with manias is what follows them: Generally, deep bear markets. If a true buying panic begins, it’s virtually inevitable that it will end with a disaster. Yet that could be a few months away, or a few years. For now, many Wall Streeters believe it’s still worth staying aboard for the ride. But increasingly, the seats on this train are for long riders only.
* A MIXED-MARKET DAY
Blue chips closed lower on profit taking; bonds rallied. D3
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Stock Market Mania?
Wall Street’s stunning rally so far this year is raising comparisons with other eras when stocks’ resilience surprised investors.
1995 vs. 1987
The Dow industrial average’s surge is reminiscent of 1987’s, when the index leaped 44% from Jan. 1 to its August peak. Weekly closes, except latest:
1995
Thursday: 4,359.66
1987
1990s vs. 1960s
The healthy corporate earnings growth of the last three years, in a low-inflation environment, resembles the period of the early-1960s--when stocks posted robust gains.
S&P; 500 Earnings Growth*
S&P; 500 Total Return
* 1990s data is for operating earnings (excluding one-time gains and losses)
New ‘Nifty Fifty’?
If the “Nifty Fifty” period of 1972, the hottest stocks sold for sky-high price-to-earnings ratios (P-Es). Hot stocks, then and now:
1972
Stock P-E Sony 92 McDonald’s 83 Intl. Flavors 81 Walt Disney 76 Avon 64 Clorox 49
1995
Stock P-E Coca-Cola 28 Gillette 26 Walt Disney 22 Hewlett-Packard 19 Intel 18 3M Co. 18
P-Es: Stock prices divided by previous 12 month’s earnings per share.
Sources: TradeLine, Bloomberg Business News. Researched by JENNIFER OLDHAM / Los Angeles Times
