Richard Russell of the Dow Theory Letters in La Jolla, Calif., flopped back to the bull camp last February. But not Dan Sullivan in Seal Beach, Calif. (he writes The Chartist Mutual Fund Timer) or The Leuthold Group in Minneapolis. Their black boxes still say that the market is doomed. Had you sold on their ‘94 calls, you’d have missed gains of 30 percent or 40 percent, respectively, on the Dow Jones industrial average. Looking back, says Leuthold’s Jim Floyd, “we had no way of anticipating public interest in mutual funds, and that’s a dominant force in the market.”
But I could have told you that without a crystal ball. Hardly a sell signal has survived the baby-boom generation’s primal urge to invest. There will come a time–maybe tomorrow, maybe next year-when stock prices do indeed collapse. But keep in mind the ad in the Financial Times: “The Clairvoyance Society of Greater London will not meet next Tuesday, because of unforeseen circumstances.” More money has probably been lost in preparing for a market drop, or wondering whether it’s finally over, than in enduring the drop itself.
I’ll stipulate this: a proud market goeth before a fall-and that should include the five-year, 111 percent spike that drove the Dow almost to 5000 last week. Still, we’re seeing one of the greatest bull markets in history, and the forces behind it remain in place:
The middle-aging of the baby boom. This dominating generation looked in the mirror a few years ago and began to obsess on ways to build a credible retirement fund. Commodities are for suckers, real estate still rots in the cellar and interest rates seem permanently stuck on “yawn.” Where but stocks is there any chance for late starters to make the pile they need?
In the past four years, more than $860 million poured into stock-owning mutual funds, up 237 percent from the four years before. This Niagara of money is going to flow for a decade at least, and it won’t be hopping into stocks for a one-night stand. The boomers are models of sober, postmodern personal finance, making regular monthly investments while murmuring their mantra: buy and hold.
Falling interest rates. More than anything else, descending inflation and interest rates drove money out of real estate and into financial investments. Smith Barney’s managing director Alan Shaw says the shift isn’t over yet. He looks for lower rates fight into the new century, carrying stocks and bonds to even higher tops.
Rising earnings. Although profits have slowed, they still show more pep than pessimists thought a month ago. Earnings are the “single most important determinant of stock-market values,” says Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School and author of the excellent “Stocks for the Long Run” (318 pages. Irwin. $27.50). By this measure, he says, stocks aren’t overpriced.
A thumbs-up economy. Companies are conducting business under uniquely favorable conditions, says Lehman Brothers chief economist Allen Sinai. After five years of growth, inflation remains low, the economy stable and interest rates under control. In Sinai’s opinion, this may become the longest business expansion even
Cash to spare. The growing inequality of income puts extra money into the hands of the class most apt to invest, says Tony Riley, director of research for A. Gary Shilling & Co. in Springfield, N.J.
Dividends to burn. Investment timers used to say that markets would drop when the average dividend paid by the stocks in Standard & Poor’s 500-stock index dipped under 3 percent. But that’s another hoary rule that today’s new-wave market undercut. Dividend yields are at their lowest in 120 years, Siegel says, and the china didn’t break. Firms are using their earnings to create value in other ways–by buying back stock, paying down debt and reinvesting m productive plant and equipment.
The bears say the optimists are nuts and have their own shelves of studies to prove it. Markets like today’s–that rise in a parabolic curve–are vulnerable to sudden faints. “A chart of the Dow in recent years is not dissimilar to Japan’s Nikkei average before it broke, or like the U.S. from 1924 to 1929,” says Irwin Kellner, chief economist for Chemical Bank in New York.
What might go wrong? An ugly budget standoff in Washington or a deep dive in technology stocks. Competition in techworld is growing fierce as capacity expands. Still, the stocks bounced back from weakness last month. Current verdict: no tech wreck yet.
Disciples of the stock-market church known as buy-and-hold say that they’re sticking to their faith. They’re investing in well-diversified funds; if prices drop, they’ll buy some more. Over four years, the major U.S. stock-market averages almost never show a loss (assuming dividends reinvested). If you hold, you’re pretty safe.
For diversification, the two most interesting stories are Europe and Japan. In recent years the American market has left those bourses in the dust. So naturally, disappointed investors have been bringing their money home.
That’s a bad bet, in the view of George Murnaghan, vice president oft Rowe Price International Stock Fund. Europe’s economies today resemble America’s in 1992, he says, with sluggishness ending, interest rates falling and business profits starting up. As for stagnant Japan, Allen Sinai says, new and stimulative government policies should gradually bring the domestic economy back to life.
Investors have been warned, since the ’90s began, that high stock-market gains couldn’t be sustained. Over time, any market’s investment performance reverts to the historical norm–and for the Dow, that’s 12 percent since World War II. The 1980s delivered an annual 17.6 percent return, which seems to suggest for the ’90s a mousy 7 percent. But that’s a wrong-way calculation, Siegel says. We paid for the ’80s in advance–because in the previous 15 years, inflation-adjusted stock returns fell. So let the ’90s roll.
