Market Surge: Why the Bulls Run

Of all the indicators that traditionally foreshadow an economic recovery, few have been more doggedly consistent this year than the stock market. For nearly six months, prices on Wall Street have climbed steadily higher, higher, higher as investors have shifted more and more cash into the market in anticipation of a brisk business upturn later in the year. Last week this confidence helped propel the Dow Jones industrial average up another 17.68 points, to a new 1975 high of 873.12. While that is still well below the Dow's alltime peak of 1051.7 in 1973, it nonetheless represents a hefty 50% rise since last December. No fewer than 225 of the 1,549 issues traded on the New York Stock Exchange have doubled or more since December.

As is usually the case in the early stages of any bull market, most of the buying--and profiting--has been done by the pros. Many corporate pension funds that cautiously kept about 50% of their assets in cash in the depths of the recession last winter are now about 70% invested in the market. Other institutions have made an even more dramatic turnabout. Philadelphia Investment Co., which had 75% of its assets in cash last fall, is now 75% in stocks. At New York's Marine Midland Bank, Vice President Richard Hobman acknowledges that "the vast majority of our cash is fully invested." Growth-oriented mutual funds have been among the heaviest stock buyers of all. The Value Line funds have been 100% in the market since the fall. Says Value Line Head Arnold Bernhard: "We don't see any need to be anywhere else."

Recent Favorites. For the most part, the institutions have concentrated their buying on blue chips like IBM (up 25% since the start of the year), such glamour stocks as Fairchild Camera (up more than 257%) and Hewlitt-Packard (up 94%), and natural resource stocks, including domestic oil and, paper companies. Other recent favorites among the pros: Federated Department Stores, Sears and other retail chains that stand to benefit from an upsurge in consumer spending as inflation abates, purchasing power increases and the recovery gains momentum. Lately many mutual and pension fund managers have been looking kindly on new stock issues. Says Felix Juda, a Los Angeles broker who specializes in trading for professional money managers: "In the past few weeks, the institutions have become very heavy buyers of new offerings."

Underlying all of the institutional buying is greater confidence that the economic recovery now taking shape will continue and that the market is not just enjoying a temporary spurt before the Dow worries itself back down to the 500s. Warnings that prices will collapse again can still be heard along Wall Street, chiefly among chartists. But they are outnumbered by newly optimistic money managers who predict that the industrial average will at least break through 900 by year's end, though probably not without a downward stumble of 10% to 25% in stock values at some point along the way. Value Line's Bernhard expects the Dow to reach the 900-950 level by year's end and sees it climbing to somewhere between 1500 and 2000 by 1980. More cautiously, Charles Booth, senior investment officer at the Bank of New York, suggests that when the Dow reaches the 925-950 level, "it will be time to reappraise the market --stand back and see if that's enough or whether it can move upward."

How much further the 1975 bull market can actually rise will be determined largely by the strength of the recovery. For that reason, investment pros are keeping a close eye on Federal Reserve policy right now: the amount of money that the control bank pumps into the economy from week to week influences interest rates and, in turn, the pace of the recovery. Says Booth: "For the stock market to go forward, we cannot have a sharp and sustained reversal of interest rates." Other money managers agree and also warn that any new outbreak of fighting in the Middle East would almost certainly send stock prices tumbling again.

Second Phase. So far, the market's six-month run-up has done little for the celebrated small investors. Burned by short-lived rallies in the past and still struggling to pay their installment debts, they have mainly stayed on the sidelines; as a consequence, they are now finding it very costly to get back into stocks. Forecasts Merrill Lynch Chairman Donald Regan: "The little guy will start in the fall with the second phase of the bull market"--that is, after stock prices have taken their first sharp dive and begin climbing again.

Yet some believe that small investors may turn up in force much sooner. Los Angeles Stockbroker Charles Rosenberg notes that he has begun to receive "calls out of the blue from small investors again." That is true to form. Says San Francisco Broker Harry Campbell: "The public buys on the basis of the Dow Jones hitting a year's high, what the neighbors say about their stocks, or some guy boasting at a cocktail party that he's made money on X-Y-Z company."

Traditionally, of course, less sophisticated investors do just that. Their usual pattern is to barrel into a bull market during its later stages; thus, as a group, they invariably lose more money than they make. They may fall into that trap again this year, but most of the street-wise institutional investors who brought this year's bull market to life believe that it still has plenty of steam for everybody.

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