The Bulls of Summer 1980

By Julie Connelly

Having soared since April, can the "Reagan market" keep going?

While most of the headlines this hot summer have been dwelling on elephants, donkeys, and dog days in the economy, the bulls have pulled a fast one. Shrugging off gloomy news about rising unemployment, sagging industrial production and red ink all over Detroit, stock prices have been surging steadily for almost four months. Last week, following a spate of near-panic buying that sent total trading volume on the New York Stock Exchange well above 50 million shares on two successive days, the Dow Jones average of 30 blue-chip industrial stocks closed at 954.69, its highest level since March 1977. The Dow's rise of about 200 points, or 26%, since its late April nadir was read almost everywhere on Wall Street as a sign that the low point of the 1980 recession is all but past. Says William LeFevre, vice president of the Purcell, Graham & Co. brokerage firm in Manhattan: "What the market seems to be saying is that the bottom may be at hand. The worst is over."

Buyers, including the banks, pension funds and other large institutions that account for 70% of share-trading activity, have been so eager to buy stocks that a total of 1,021 billion shares changed hands in July alone, the second busiest month in Wall Street history; the heaviest was last January, when prices also rose sharply, only to be sent plunging down later when inflation and interest rates climbed into double digits. The hunger for stocks has lifted not only the Dow's lately depressed industrials but also the broad stock averages. Since the end of March, the composite index of the 1,531 common stocks listed on the New York Stock Exchange has risen by 28%, while the yardstick for the 880 firms traded on the American Stock Exchange has climbed 48%.

Blue chips have done well: once battered IBM has climbed from its April low of 51 to 65 1/4, and even the beleaguered auto companies are turning up on brokers' "recommended" lists. Though General Motors announced the worst quarterly loss in its history ($412 million) last month, its stock has moved up from its April low of 39 1/2 to 54 1/8, reflecting investors' confidence that most of the company's troubles were out of the way. The highest fliers have been companies involved in advanced technology or in-demand specialties. Two big gainers: Dataproducts Corp., a computer technology company that has soared from 12 3/4 in four months to 27 1/2; and Air Express International, a cargo airline that has gone from 6 1/2 to 16 1/2. The stock group that has been relatively weak of late has been oil firms; they led the market in April and May, but some investors who rode those stocks up have taken their profits to put them in cheaper shares.

Savvy money managers began looking at stocks with renewed interest last spring, when they decided that the second quarter's 9% drop in the gross national product did not necessarily foreshadow a long and deep recession. After all, there were some signs of economic health to be seen. Interest rates started falling rapidly in May, following the peaking of inflation at 18% in March; the "leading" indicators, which point to the future direction of the economy, turned up smartly in June, and housing began to show signs of renewed life in July. For many professional investors, the most convincing buy signal came in early July, when it turned out that second-quarter corporate profits had declined by a less-than-expected 9%. Says Barton Biggs, a managing partner at the Morgan Stanley & Co. investment banking firm: "The market is tracking a classic recession pattern. In general the best gains have come after the worst decline in corporate earnings."

Politics is also playing a role in the stock surge. Says Ignatius Teichberg, a vice president at Gruntal & Co. brokerage firm: "The market will continue to rise because the investment community anticipates a Reagan victory in November." One reason for this is lingering faith among investment managers in an old rubric that says that stock prices usually rise during election years, but they climb higher and longer when the Republicans win than when the Democrats do. But the Dow industrials have not risen in the first year of a Republican Administration since 1925, after Calvin Coolidge was elected; on the other hand, the only time since the end of World War II that the Dow fell during the first year of a Democratic Administration was 1977, when Jimmy Carter went to Washington.

Market history aside, Wall Street generally views Reagan as a pro-business conservative who is likely to try to do better than Carter at attacking inflation. But no matter who emerges as the victor in November, investors seem to feel that 1981 will bring efforts at tax reform that will encourage investment and growth, and thus be good for stocks.

Many market seers talk earnestly of the Dow's reaching 1000 by year's end, a level it last reached on Dec. 31, 1976, when it closed at 1004.65. What is needed to keep the bull market charging ahead? One thing would be investor confidence that there will not be a rerun of the spurt in interest rates that nipped the January boom. Another spur would be broad recognition that stocks remain cheap, especially in comparison with real estate, gold and other assets. Ten years ago, one ounce of gold, then worth $35, would have bought a little more than one share of U.S. Steel, which then was selling at 27; today Steel is at 24 3/4, but an ounce of gold is worth $630, or enough to buy 25 shares.

There is plenty of money around that could be funneled into stocks. Large institutions still have some 15% of their as sets in cash or the equivalent. Foreign investors, who poured $2. 1 billion into U.S. shares earlier this year, have yet to enter the present market in a big way. More investment funds could surely be coming from substantial individual savers who put cash into short-term (up to 26 weeks) Treasury bills, certificates of deposit and other kinds of paper last spring when interest rates on them were as high as 18%. As these securities reach maturity, their holders may not want to reinvest their money in new short-term paper, now that the rates on some have dropped to 8 3/4% or so, and will not even consider bank savings accounts, which pay 5.5%; so a logical alternative is stocks, which offer both a return in the form of dividends and the promise of appreciation in price.

The average "little guy" investor, however, is still sticking with money market funds even though their yield has declined from the spring high of 15.96% to 8.50%. As of June there was $81 billion in such funds.

The key to a sustained rise has to be visible signs of economic improvement. Says Purcell, Graham's LeFevre: "The greatest thing would be if Carter's program started to work, and people could see lower inflation and lower interest rates." Given that, the bulls of summer might have a longer season. --By Julie Connelly. Reported by Frederick Ungeheuer and Sue Roffety/New York

With reporting by Frederick Ungeheuer, Sue Roffety/New York

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