. . . but surge in stock market looks to be long lasting
In just six months, the Dow Jones industrial average has soared -- up an unprecedented 450 points. But are we heading for a crash? Is a market heading toward 1,800 too good to be true? Not at all, says Monte Gordon, director of research at the Dreyfus Corporation, a large mutual fund. ``Two thousand, 2,500, even 3,000 on the Dow is not implausible.'' But he adds, ``Nothing moves in a straight line.''
How can such unheard of heights be reasonable?
By some historical benchmarks, stocks are still cheap. Stocks of the 30 companies in the Dow industrial average are now selling at prices 12 times higher than their expected earnings in 1986. But these prices are still below the average postwar stock price of 15 times expected earnings. They are also far below the prices paid for Dow companies in the 1960s when they hit 24 times earnings.
If the Dow tops 2,000, stock prices will have risen to only 16 times earnings, slightly higher than the historical average.
There are other reasons for expecting the bull market to continue -- with occasional setbacks.
``We're in a situation where everything you could ask for to create a strong stock market has fallen into place,'' Mr. Gordon says.
Interest rates are slipping, and are now down to levels not seen in more than eight years. Inflation is at a low level. The collapse in oil prices helps ensure inflation will stay down.
These factors bode well for keeping costs down and stimulating business.
But since the economy still appears sluggish, there's the added hope that the Federal Reserve Board may possibly cut interest rates further. Taken together, these factors make returns on stocks more attractive to investors than hat-size yields (about 7 percent) now found on some bonds or certificates of deposit.
``You're looking at a stock market that is anticipating a favorable environment over the next few months to a year,'' Gordon says.
Indeed, analysts say falling interest rates prompted the 43.1 point jump in the Dow on Tuesday to 1,746.05.
But it is also pointed out that the Tuesday rally wasn't as significant as it might appear. Yes, it was the second biggest one-day jump in the Dow -- but not on a percentage basis. Since the Dow is at a higher level now, a 43-point rise is equivalent to only a 2.5 percent hop -- nowhere near the 4.2 percent jump on Nov. 3, 1982, when the Dow gained a record 43.4 points.
Nonetheless, this week's jump surprised many analysts. ``Apparently there is still quite a bit of cash that's eager to be in this market,'' says Eugene E. Peroni Jr., director of technical research at Bateman Eichler, Hill Richards Inc., a Los Angeles brokerage firm.
Some analysts believe one of the short-term sources of fresh cash for stocks is coming from new individual retirement accounts (IRA). It's estimated that $45 billion to $50 billion will flood into the tax-free IRAs by April 15.
Says Mr. Peroni: ``We haven't seen the last hurrah in this market yet.'' He also thinks that 2,000 on the Dow is ``not unreasonable.'' But in the near term he expects the market to move to ``somewhere over 1,800 before we get a reversal.''
What could upset the bull-market scenario? Ironically enough, a very strong economy. In Wall Street's ``good news is bad news'' logic, a pickup in business could increase borrowing, thus raising interest rates. Then, bonds might become more competitive with stocks.
``As the year progresses, earnings will be a more significant factor. The market will become choppier,'' predicts Cary Retlin, an investment strategist at Thomson McKinnon Securities Inc.
While unlikely, if the price of a barrel of oil rebounded back over $20, that could reignite inflation. That would be another overall negative for the stock market. Oil prices have firmed in recent days. Analysts will be watching closely the results of the meeting this weekend in Geneva of the Organization of Petroleum Exporting Countries.
For now, Peroni is advising investors to stay ``committed to riding the crest of this powerful and dynamic market.''
Meanwhile, Monte Gordon agrees this current rally has some oomph left in it but warns ``at some point when the market appears least vulnerable, that's when you'll have a short-term drop.''