The record-setting bull market continues to charge toward '86
No doubt 1985 will go down in the annals of Wall Street as one of the greatest of bull markets. In fact, this 40-month-old steer is among the nimblest hoofers on record. Only one other rally since World War II has been this strong. Only two others have lasted this long. And the gains in 1985 alone are the biggest in a decade.
A year ago, as the last chorus of ``Auld Lang Syne'' subsided, the Dow stood at a respectable 1,211.57. By mid-February the Dow Jones industrial stocks were gathering steam. The blue chip average was up 6 percent. But the real action was in the second-class markets. The NASDAQ industrial average notched an 18 percent gain in the same period.
By spring the nickel-and-dime stocks took a breather. The torch passed to the Dow. On May 20 the Dow Jones industrial average closed above 1,300 for the first time in history and then ran up above 1,370, before wilting in the August heat.
But autumn ushered in renewed optimism. Within days of the Group of Five agreement (a five-nation pact to devalue the dollar in order to lower interest rates and pep up economies worldwide), the market began a pell-mell three-month rally. Big mergers, lower interest rates, and lower oil prices added fuel to the market's blazing ascent. This time it was the blue chippers -- not the over-the-counter stocks -- leading the charge.
The Dow whipped past the century marks as if such ``psychological barriers'' were mere figments of the technical analysts' imaginations. Fourteen-hundred was easily punctured on Nov. 6. And in record time the Dow rushed through 1,500, eclipsing that milestone on Dec. 11.
Year-end tax selling slowed the market early last week. But by the end of the week, the Dow Jones industrial average was forging ahead once again. It closed at 1,543.00, unchanged in four sessions and posted a 16.51-point gain on Friday. The Dow is now quite close to its all-time high of 1,553.10 set on Dec. 16.
Behind much of the stock market's strength this year were equally impressive and successive rallies on the bond market. Long-term Treasury bonds were yielding about 11.5 percent as 1985 dawned. But for the first time in six years yields fell below 10 percent. Now a 30-year government bond garners about a 9.5 percent return. (As the economy muddles along, it's generally assumed the Federal Reserve Board will ease credit restrictions, thus bringing interest rates somewhat lower.)
The US dollar added another chapter to the tale of the '85 bull. Since its peak in March, the dollar has slid about 18 percent relative to most other currencies. This has boosted, and continues to boost, the stock of big multinational companies.
Inflation stayed low in '85 as commodity prices continued to tumble, with oil prices heading even further south in recent weeks.
Many on Wall Street see 1985 as a turning point in the collective consciousness of investors. This year there was a gradual but growing acceptance that inflation has been licked, or at least temporarily subdued. In periods of low inflation financial assets (stocks and bonds) tend to outperform hard assets (real estate, metals, collectibles). The performance of the stock and bond markets in '85 has supported this perception.
Will 1986 be cast in a similar mold?
Take note of what major Wall Street brokerage houses are saying, and decide for yourself:
Robert Farrell, Merrill Lynch's chief market analyst, is on record as seeing disinflation or low inflation as the trend through the late '80s. ``I think of this as a long bull market. At various points it becomes overvalued. But this ['85 rally] is only the second step of three steps along the way,'' he says. He expects the IRA funds -- flush with new money -- to help the market bloom again in the spring but fade later in the year.
Leon Cooperman, head of research at Goldman, Sachs & Co., is bullish but not overly so. ``The upside potential,'' he writes in a recent investment report, will be only about what is available on short-term bonds and could be less. Cooperman recommends purchases of cyclical and smaller capitalization issues but warns that the small caps are ``in the late stages of this market advance.''
One of the most sanguine outlooks comes from Prudential-Bache director of research Greg A. Smith. He sees stocks outgunning bonds as the economy gathers momentum (and interest rates stop falling) in the second half of '86. Early in 1986, he expects a lower dollar, lower energy costs, and lower interest rates to push up corporate earnings. ``Murphy's Law is being suspended for the next six months -- that what can go right, will go right,'' he enthuses.
Multinationals and interest-rate sensitive stocks are on the top of the Pru-Bache buy list. Technology issues get the nod in the second half when business activity should buoy purchases of electronic goods. Smith also expects small cap growth stocks to be favored in early '86.
As for the bond market, Salomon Brothers' chief economist Henry Kaufman adheres to a slow-start, fast-finish economic scenario. The year should begin with a bond rally as ``the recent decline in interest rates will extend into the early part of 1986,'' predicts Kaufman. The federal funds rate (now at 8 percent) will slip ``toward 7 percent.'' But by the second half of next year, Kaufman thinks the economy will be chugging along at 4 percent annual growth, putting ``modest'' upward pressur e on interest rates.
If this bull market should continue, just how much higher are stocks going?
Robert Prechter, disciple of the Elliot Wave theory and among the better market timers of recent years, was considered by many to be a stark, raving bull back in early February of this year when he said on this page, ``In 1985 you will see the biggest and broadest move of the decade -- a minimum upside of 1,600'' on the Dow. Today, he sticks to his guns. He expects 1,700 early in 1986 and double that figure by the late 1980s.
John Templeton, who manages $4.25 billion in mutual funds bearing his name, recently said the next bull market was going to be ``a beauty.'' And he mentioned 1,800 on the Dow as a possiblity.
But forecasting is more art than science. Disagreement among the sagest of Wall Street sages is legendary. While market analysts often base their predictions on sound, past precedents, history has a delightful habit of not repeating itself.
For instance, almost exactly a year ago, interviews with several top market analysts produced a story on this page entitled, ``Markets march into '85 to a slower beat.''
A month later, over-the-counter stocks were surging -- and what the Dow did to the bears in 1985 is, well, history now.