Market keeps surging, but how long will it last?

April 18, 1992|By Thomas Easton | Thomas Easton,New York Bureau

NEW YORK -- The latest bull market on Wall Street stopped yesterday, halted by apparently the only thing short of a cataclysm that could do the job: a holiday.

Share prices have soared this week and in the past year, ignited by any whiff of good news.

Why? It's "stark raving mad," concludes Forbes magazine in a recent cover story. Lower interest rates initially, and now better earnings to come, responds Guy Scott, a senior vice president at the Boston Co., an investment subsidiary of Shearson Lehman Bros.

The Dow Jones industrial average rose 111 points this week, to a record 3,360.50 -- a 3.4 percent gain approximately matching its rise since the beginning of the year. That surge has apparently fed -- and been fed by -- a deluge of funds from individuals. They have poured more money into the stock market over the past five months than at any time since 1987, said Jordan Goodman, editor of Money magazine's small investor index.

"This is not the end; this is the beginning," Mr. Goodman predicted. Interviews with small investors, he said, suggest that they face "rate shock" when forced to confront reinvesting certificates of deposit at today's low interest rates.

Whether returns from investing in shares will be any better than the low yields on short-term notes, however, is far from certain.

Reasons for caution abound. Traditional measures for gauging when shares are expensive -- such as price-to-book value, price-to-earnings and price-to-dividends -- have been extremely high for months.

Moreover, there have been disconcerting signs of a market mania, such as a deluge of new offerings for companies, many consisting of untested ideas and profits. Some of the most high-flying, primarily in biotechnology, have already fallen, and the new-issue market appears to have slowed, as it tends to do from time to time.

An early sign of retreat? Perhaps. Or possibly just the simple reality that -- even in an era of promising new ventures -- only a limited number of good businesses are ready to go public at any given time.

Lately, optimism has revolved more around the old than the new. Good news from International Business Machines Corp., Aluminum Co. of America and TRW Corp., among others, has prompted many analysts to conclude that the painful restructurings announced over the past few years have started bearing fruit.

"Sure, stock prices are high relative to earnings over the past 12 months, relative to dividend yield and by price to book, but when you look ahead, they're really not that high," said Boston Co.'s Mr. Scott. "Earnings are expected to be up a sizable amount, in

excess of 20 percent. Many of the unglamorous heavy-industrial companies expect strong recoveries, and that is what they are seeing."

The enthusiasm has even reached the auto manufacturers, awash in billions of dollars in red ink. Ford Motor Co. might soon report a quarterly profit after more than a year of losses. Its stock rose this week, along with that of General Motors Corp.

"These stocks are breaking out of trading ranges," Mr. Scott said. "People are beginning to see an improvement in their outlooks."

His perceptions are not unique. This week, Goldman Sachs TC Co. strategists added to their recommended list a slew of paper and chemical companies whose prospects are tightly tied to the economy. "We've gained confidence that the economic recovery is in place, will be long lasting and will gain strength over the next 12 to 15 months," they said.

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