Bubbly Times for Bulls

By Charles P. Alexander

It was the year that Newton's laws were repealed on Wall Street. What went up never came down--at least not for long. After starting 1985 at 1211.57, the Dow Jones industrial average broke the 1300 barrier in May, smashed 1400 in November and surged to a peak of 1553.10 on Dec. 16 before settling at 1543.00 at the end of last week. The advance was fueled by the billion-dollar money managers who handle the investments of pension funds, insurance companies and bank trust departments. By the end of the year, even the most cautious of these institutional investors were under pressure to join the rush rather than risk missing the greatest bull market of all time.

The stock surge was in part the product of encouraging economic signs: falling interest rates, low inflation, sagging oil prices, a declining dollar that will help reduce the U.S. trade deficit, and enactment of the Gramm-Rudman law to slash the federal budget deficit. The market was also driven by merger fever, as opportunistic investors pushed up the prices of companies thought to be takeover targets.

The relentless rally was not limited to the blue-chip stocks of the Dow. The Investor's Daily index of more than 5,200 stocks traded on the New York and American exchanges and over the counter had risen almost 33% in 1985 by the end of last week. From such familiar favorites as General Electric and American Express to small, obscure companies like California-based IntelliCorp, which is developing artificial-intelligence programs for computers, the large majority of share prices went up. If investors picked stocks by throwing darts at the Wall Street Journal listings, they stood an excellent chance of making money.

Even high-technology shares, which were severely depressed in 1984, came back to life. Leading the way was IBM, the top computer manufacturer, which rose 26%, to 155 1/2. Smaller companies scored even more spectacular gains. Genentech, the gene-splicing firm, jumped 95%, to 66 5/8. Zenith Laboratories, a drug manufacturer, more than tripled, from 6 1/2 to 20. Other industries with high-flying stocks included drugs, retail clothing, insurance, cable TV, pollution control, and lawn and garden products.

This year's drop in oil prices produced a new cast of Wall Street winners and losers. It was a boon to the airlines, which got a break in their fuel bills. Shares of UAL, the parent of United Airlines, have gone up 12.5%, to 49 1/2. At the same time, oil-company stocks have been lagging behind the rest of the market. Amoco shares have slipped from a high of 70 1/4 to 62 1/4, and Mobil's stock has dropped from a peakof 34 3/8 to 30 1/4.

Institutional investors have become an increasingly dominant force in the market. This year, for the first time in history, more than half the volume on the New York Stock Exchange resulted from trades of blocks of 10,000 shares or more. Such large deals are made almost exclusively by institutions.

At the same time, more and more individuals were putting their money on the line. A record 47 million Americans now own stock, up from 42 million in 1983. A major reason for the rise is the increasing income of women, who make up 57% of the new shareholders. A New York Stock Exchange study showed that the typical new investor is female, 34, married, works in a professional or technical position, has a $2,200 portfolio and an annual household income of about $35,000.

The fastest-growing investment vehicle for individuals is the mutual fund, which pools clients' money into huge stock portfolios. By buying shares in a fund, an individual can leave the stock picking to experts and still have a chance to reap big profits. October sales of mutual funds that invest primarily in U.S. stocks were $2 billion, up 50% from the same month a year ago.

While most individual investors seek the relative safety of funds, a select breed plays the hazardous game called risk arbitrage. These daredevils buy stocks in companies that they think are vulnerable to a takeover. If one of these firms does indeed receive a merger bid, the arbitragers stand to make huge profits, but they can suffer staggering losses if no deal materializes. In 1985, arbitragers boosted the price of shares in dozens of companies before they were acquired, including General Foods, RCA, Revlon and Richardson-Vicks.

The takeover rush also increased the value of stocks in a more fundamental way. To guard against hostile merger bids, many companies bought back a portion of their own shares. In many cases, a management group acquired all the stock through a so-called leveraged buyout and took the company private. In all, at least $100 billion worth of shares, or about 5% of the stock in American companies, was taken off the market by mergers, acquisitions, buyouts and stock-repurchase plans. That made the stock that was still being traded more valuable.

Many market watchers believe the rally will keep rolling in 1986. Says Mason Sexton, president of Wall Street's Harmonic Research: "You don't stand in the way of this bull if you value your life." He thinks the Dow will probably pierce 1600 before declining grudgingly. David Bostian, president of Manhattan's Bostian Research Associates, is optimistic about the longterm outlook for stocks but warns that the bulls may stumble in the next few months. Says he: "We're way overdue for a steep correction. An investor should not be doing aggressive new buying."

But the market has been in no mood to listen to words of caution, even from well-known seers like Joseph Granville. When Granville issued his famous "sell everything" recommendation on Jan. 6, 1981, the Dow dropped 23.8 points in a single day. This year Granville issued The Warning, a book predicting a stock-market crash comparable to the disaster of 1929. Since the book appeared in September, the Dow has climbed 222 points. --By Charles P. Alexander. Reported by Raji Samghabadi/New York

With reporting by Reported by Raji Samghabadi/New York