1996-96 REVIEW AND OUTLOOK : Whoa, Nellie--Dow Up Again : Traders Break Into Song as Dow Gains 33.5% in 1995
If you didn’t make money in U.S. financial markets this year, submit yourself to Ripley’s Believe It or Not. You won’t have much competition for that particular page.
Wall Street closed out a spectacular year Friday with another rally in stocks and bonds, and no shortage of predictions for more--if smaller--gains in 1996.
The Dow Jones industrial average rose 21.32 points Friday to end at 5,117.12, bringing its advance for 1995 to a stunning 33.5%, the biggest since the 38.3% surge in 1975.
In the broader market, the Standard & Poor’s 500 index leaped 34.1% for the year, its best performance since 1958. And smaller stocks, while lagging blue chips, still rocketed 26.2% on average, as measured by the Russell 2,000 index.
No wonder that at the New York Stock Exchange on Friday, traders merrily joined in the song traditionally warbled during the year’s final session: “Nellie,” from a 1951 film of the same name. “Wait till the sun shines, Nellie, when the clouds go drifting by. We will be happy, Nellie, don’t you sigh.”
There was plenty of happiness to go around the bond market this week as well, as there was for most of this year. The 30-year Treasury bond yield sank to a new 26-month low of 5.94% on Friday from 5.98% on Thursday, leaving it almost 2 full percentage points below its level at the start of the year.
Indeed, the bond market’s mostly unexpected rally was the lead horse pulling the stock market in 1995, as the Federal Reserve Board engineered a “soft landing” for the U.S. economy, inflation stayed low and Congress and President Clinton got serious about a federal balanced-budget plan.
The long-suffering dollar also did its part, reviving enough since spring to end fears of a currency meltdown, but not enough to spark major concerns about an erosion of U.S. companies’ competitiveness abroad.
All in all, American markets looked and acted like the luckiest markets in the world in 1995. Most foreign stock markets, by comparison, were uninspired at best and downright dismal at worst.
But even with the Dow index’s 6.8% rise in the fourth quarter, adding to the first three quarters’ relentless rise, trouble spots have surfaced in the stock market:
* The Dow itself peaked at a record 5,216.47 on Dec. 13 and has been unable to find its footing since, despite the continuing deep slide in bond yields.
* Technology shares, which came to symbolize the mania to own stocks in 1995, have stumbled badly in recent months. Some are already well into their own personal bear markets. The Hambrecht & Quist technology stock index has slumped 7.1% from its record high reached Nov. 3.
* Many cyclical industrial stocks also have been pounded, reflecting investors’ concerns that the U.S. economy is sliding from moderate growth to extremely weak growth to recession. Paper giant Georgia-Pacific, for example, has seen its shares plummet from 95 3/4 to 68 5/8 in recent months.
* Robust corporate earnings growth, which supported the market all year and provided the wherewithal for the takeover and stock-buyback boom, is definitely becoming less robust with the decelerating economy.
New York-based IBES, which tracks analysts’ earnings estimates, says overall operating earnings for the S&P; 500 companies are expected to rise 14.6% in 1996, down from an expected 18.5% increase in 1995. And the 1996 estimate, IBES’ Richard Pucci concedes, is probably far too optimistic given the economy’s sluggishness.
But the same concerns about earnings have dogged the stock market all year. What has amazed the bulls--and frustrated the bears--is that investors have continued to “rotate” their stock preferences all year, always seeming to find enough to buy--even as they sell other shares--to keep the market as a whole moving forward.
Even the technology-heavy Nasdaq composite index, up 38.8% in the first three quarters, managed to eke out an additional rise in the fourth quarter as gains in other stocks made up for technology shares’ woes. The Nasdaq finished the year up 39.9%.
That gravity-defying performance is partly a function of the record sums individual investors continue to pour into mutual funds, says investment strategist Eric Miller at DLJ Securities in New York.
As money is shoveled to the funds, “There is a necessity for the managers to remain fully invested,” Miller says. That forces them to search high and low for stocks to buy and keeps the market advancing.
Individuals, and fund managers, face the same basic problem, analysts say: What else can they do with their money, with bond yields paltry and money market yields even worse?
“If I take my profits in stocks, what am I going to buy?” strategist James Solloway at Argus Research in New York asks rhetorically.
Yet Wall Street veterans concede that bull markets can become dangerously overextended when stocks begin to win purely by default. What’s more, there is evidence that many formerly bearish analysts are throwing in the towel--also a worrisome sign, because if too many people are bullish, the market often likes nothing better than to fool the majority and suddenly dive.
The Investors Intelligence weekly survey of independent market newsletter writers now shows 49.2% bullish, the highest percentage in three years. The bears total 30% and the writers expecting a simple “correction” in stock prices total 20.8%.
Yet many Wall Streeters, while acknowledging that a market as hot as this year’s is naturally at risk of a sharp pullback at any moment, insist that the fundamentals still are flashing a green light for U.S. stocks and bonds.
The markets may have been exceedingly lucky in 1995, “but that luckiness doesn’t just end because it’s Dec. 31,” says Bluford Putnam, investment strategist at Bankers Trust in New York.
The Fed, Putnam notes, still appears extremely likely to lower interest rates further to assist the economy, Congress and the president are under intense pressure to strike a budget deal, and corporate earnings growth, even if much slower in 1996, is still likely to be positive--for the fifth straight year.
He thinks blue-chip companies’ earnings can rise 10% to 12% in ‘96, on average.
The bulls also have something else on their side: history. Many of the market’s biggest years have been followed not by declines, but by another advance, albeit a smaller one. And historically, it’s rare to have a losing stock market in a presidential election year.
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WALL STREET GOES WACKO!
With apologies to the Weekly World News and other sensational supermarket tabloids, here’s a tongue-in-cheek review of the markets’ year that was:
Bulls trample bears in mad rush to own stocks!
Dow industrial average rockets 1,282.68 points to 5,117.12, or 33.5%, best gain since Gerald Ford slept in White House!
Bond yields plunge as Federal Reserve magicians pull ‘soft landing’ out of hat!
30-year Treasury bond yield sinks to 26-month low of 5.94% from 7.88% at start of year!
Corporate earnings defy gravity!
Post fourth straight year of double-digit gains!
U.S. dollar returns from grave!
Closes 1995 at 103.40 Japanese yen, up from record low of 80 yen in spring!
