A record year has transformed investing, and the ride may not be over yet
Two years ago, Steven Fishman was a New York University student without a job but with a keen eye for a bargain. Today Fishman, 20, is still a student without a job, but he is $50,000 ahead. He made that much on the stock market, mostly by devoting his lunch hours to trading options on the stocks of Tandy and Digital Equipment. The profits have paid for a few years of his N.Y.U. tuition, plus, as he puts it, “a lot of dinners with my girlfriend.”
Fishman is one of hundreds of thousands of investors, small and large, individual and institutional, who have scored handsomely in the great bull market that began on Aug. 12, 1982. For them, it has been a year of superlatives like “biggest” and “richest.” Records have crumbled. Hundreds of billions have been made, at least on paper.
Last week, just before the bull market’s first birthday, Citibank threatened to spoil the party. It raised its prime rate from 10½% to 11%. Other banks followed, and stock prices sank as they almost always do when higher interest rates loom. By week’s end they had begun a modest rebound, but investors remained nervous. Even so, nothing could change the fact that it had been quite a ride—and, despite the inevitable “corrections,” it might have a lot more mileage in it.
From last year’s low to this year’s high, Standard & Poor’s index of 500 stocks was up 67%. Another S & P index of low-priced stocks had jumped 152%. Value Line’s Composite Index, closely watched by many small investors, had ballooned by 86%. The most widely watched indicator of all, the Dow Jones index of 30 industrial stocks, turned in one of its best performances ever.
A year ago, the Dow stood at 776.92.
In June it reached a record 1248.30, up 61%. That increase is rivaled by only one other in the history of the index, which was begun in 1884 by Charles Henry Dow, the first editor of the Wall Street Journal. In 1932 and 1933, on the eve of Franklin Roosevelt’s New Deal, it rose from 41 to 105, or 156%, more than doubling. That market, like the current one, was severely undervalued to begin with.
The buying is not over yet. Since June 16, the Dow has fallen 65 points, to close last week at 1182.83, and there is bound to be more faltering along the way. Certain high-tech stocks have taken a bit of a beating in the past two months and sell for 30% to 50% less than in June. But even with that sharp drop most are still doing very well. Apple Computer, for example, is down to 33½ from a high of 63¼, yet is still way ahead of its 52-week low of 12.
Many Wall Street watchers remain bullish. Says Treasury Secretary Donald Regan, former chairman of Merrill Lynch: “The market was due for a pause. But it isn’t overdone.” Indeed, in the view of Regan and almost everyone else, the bull market still has a lot of life in it. Says Arthur Zeikel, president of Merrill Lynch Asset Management: “We are in the fourth or fifth inning of a nine-inning ball game.”
The innings so far have transformed the whole climate for investing. Individuals and institutions, many of whom lost faith in stocks during the 1970s as a hedge against inflation, have returned to the market in droves. Since last August, Merrill Lynch has added 900,000 customers to the 3.2 million it already had. At a time when big brokers are linked to their customers largely by area code 800 telephone numbers, many investors have begun patronizing the hundreds of small discount brokers that have sprung up in storefronts and lobbies. Banks also are getting into the act, buying discount brokers and offering their services. Last week, for example, the Federal Reserve permitted Chase Manhattan to acquire Rose & Co. Investment Brokers. BankAmerica and Citicorp already own brokers.
As investors have flocked back, financial institutions have hurried to cash in by changing the way they do business and even the way they are organized. Brokerage houses, banks, insurance companies and even credit-card firms have gone into a kind of mating frenzy, merging left and right and creating new organizations with names like Shearson/American Express and Prudential-Bache. By offering a “supermarket” of financial services, these firms permit an investor to pick up stocks along with auto shocks at his local Sears, to write checks and sell shares through a Merrill Lynch Cash Management Account and to have his Visa transactions recorded along with his stock trading.
Such new approaches to money management have at once capitalized upon, and accelerated, a shift in the investing habits of the typical American family. Chief Portfolio Strategist Steven Einhorn of Goldman, Sachs estimates that individual investors bought $23 billion in stocks during the first three months of this year, twice the pace of the last quarter of 1982.
In the process, many of the glamour investments of the 1970s have fallen from favor, notably nonproductive “collectibles” like wine, antiques, coins and other such prosaic places to put money. The stock market is also luring funds that, through the 1970s, were going into precious metals, gems and real estate, even though their prices have continued to rise. Silver, for example, was selling in June for 109.5% more than it was a year earlier, gold for nearly 30% more. Diamonds, though, did not gain.
Traditionally a forecaster of economic activity, the market this time proved to be unusually sensitive. Last summer the U.S. economy was still headed down, hitting its low only in November. Unemployment was rising to levels not seen since before World War II. Sales and earnings of companies large and small were down after a year of recession. Stock prices were at a two-year low.
A few analysts, however, had sensed that an explosion lay ahead. In August the sparks started flying. On the 13th, with inflation down sharply, Federal Reserve Chairman Paul Volcker unexpectedly announced still another reduction in the discount rate, from 11% to 10.5%; two cuts had already been made. That credibly signaled easier money after almost three years of an anti-inflationary clampdown. On the 15th, Ronald Reagan gave a speech asking for $99 billion in new taxes to reduce the federal deficit. On the 17th, Salomon Brothers’ influential economist, Henry Kaufman, predicted that interest rates on long-term Government bonds would fall sharply, to 8% or 9%.
With that triple dosage of encouragement, the market in the next ten months set 25 records. It was fueled by an enormous influx of cash held by pension funds and other institutions. Another source: $35 billion from individuals seeking to set up their own Keogh plans and individual retirement accounts, the latter provided under a law opening such benefits to all employees as of January 1982. Much of the IRA money was switched out of bonds and money market funds and into equity mutual funds (see chart). So was a great deal of non-IRA money. As interest rates dropped and private individuals saw they could make more money in securities, money market investments declined by $62 billion, even as $39 billion was gushing into mutual funds for stocks.
By Oct. 21, the Dow had steamed ahead 260 points, to 1036, the largest point gain in any two-month period ever. On Nov. 3 came the biggest one-day gain: 43.41, pushing the Dow to 1065.49. That broke the old record of 1051 set a decade earlier, in January 1973. A day later came the largest single day’s trading volume: 149,350,000 shares, a load handled almost effortlessly by new computerized trading systems at the New York Stock Exchange and drastically modifying the definitions of what were “light,” “moderate” and “heavy” trading days. From August through June, an average of 86 million shares was traded daily. A 50 million-share day is now regarded as soso; in the late 1940s trading rarely reached 1 million shares a day, and even in the 1960s a 6 million-share day was considered a monster. (Of course, the volume of shares outstanding has increased by 74% since 1975.) Says William M. LeFevre of New York’s Purcell, Graham & Co.: “Now if you don’t get 15 million or 16 million shares in the first hour, brokers worry about slow days.”
The wealth created by the upward push in the price of stocks dwarfed the figures from any bull market since records started being kept. In all, according to the authoritative Wilshire index, some 5,000 stocks had produced $660 billion in paper profits by last week, down somewhat from the $700 billion or so in June when stocks were at their highest. If the total seems breathtaking, it must be measured against the fact that a decade and more of inflation had so seriously eroded stock values that for many investors, the bull market’s gains enabled them to do little more than recoup losses. Just to keep up with inflation, the record 1051 Dow should have stood at 2445 by November 1982.
Of course, some people made out smashingly well anyway. Former Treasury Secretary William Simon netted a handsome $66 million when he weaned Gibson Greeting Cards away from RCA in a complex buyout maneuver and then, having picked up its stock for 14¢ a share, turned around and offered it to the public for $27.50. David Packard, co-founder and major shareholder in California’s Hewlett-Packard, a high-tech pioneer and leader, saw his personal fortune grow by $1.1 billion in eleven months, as H-P’s stock rose from 38 to 83. Five members of the family of Sam Walton, the co-founder of Wal-Mart, a dynamically growing Arkansas-based retailer, were centimillionaires even before Wal-Mart stock rose from 25 to 42; that helped add $200 million to $300 million apiece to their worth.
Ordinary shareholding families did not do badly, either. From last August through June they took some $63 billion in profits from the growth in value of their stocks. But at the same time, according to the Federal Reserve, the worth of stock held by households (as opposed to financial institutions) jumped from $959.5 billion in June 1982 to $1,296 billion by April, two months before the bull market’s high. That means that after profit taking, the worth of stocks in households still increased by $337 billion.
According to one survey by Kidder, Peabody, all industry groups gained from the bullishness. The stocks of Wall Street brokerage houses, fittingly enough, rose the most as a group: 326%. Next came gold-mining stocks, up 223%; communications, up 213%; savings and loans, up 206%; and homebuilding, up 204%. Stocks of long-bedraggled automakers and textile producers doubled on average, and those in the depressed steel industry rose 57%. Even stocks that had the smallest appreciation—tobacco companies, entertainment firms and electric utilities—rose a respectable 30% or so.
Between now and the end of the year, say analysts, stock prices could break further records, with large jumps in big-name, high-capitalization stocks. IBM, at 118 last week, could go to 150 by next August, and General Electric could rise from 48 to 70. Even though those and many other issues have risen sharply during the past year, they still are viewed as undervalued.
Wall Street’s more optimistic bulls see stock prices rising for the rest of the decade and well into the 1990s. The 1000 level on the Dow, cracked only a few times in history before last November, may be a new floor for stock prices. Says Morgan Stanley Portfolio Strategist Barton Biggs: “The Dow will never see 1000 again.” Value Line Chairman Arnold Bernhard, 81, who has watched the market for six decades, foresees a Dow of 1400 by the end of the year, 1800 to 2200 in three or four years. Bernhard believes that stocks, particularly of Dow Jones companies, are grossly undervalued, just as they were during the market’s Depression trough half a century ago. Says he: “We are really looking at the market bottom right now.”
Probably the bull market’s most enduring legacy will be a renewed confidence on the part of Americans that there is money to be made in stocks. The market came along at just the right time, when inflation was abating. To investors, that meant that real return on stocks—and all other financial investments, for that matter—was higher because it was not being consumed by inflation. Already the number of American shareholders is back at about 32 million, 7 million more than in the mid-1970s. That will make for all the more revelry at future bull-market birthdays. —By John S. DeMott. Reported by Frederick Ungeheuer/New York
