A Very Bullish Beginning for 1976

Wall Streeters are accustomed to it.

As each new year begins, stock prices generally rally at least slightly, rebounding from the December sell-offs when investors dumped lackluster shares to establish losses for tax purposes. What happened last week, however, far surpassed the usual January flurry: with a powerful surge, the stock market leaped into the new year. On each day last week, prices successively chalked up solid to spectacular gains, adding a total of 52.42 points to the Dow Jones industrial average. That barometer broke through the psychologically important 900 mark to close the week at 911.13.

Though that is still far below the all-time high of 1051.70 in January 1973, brokers were delighted that the Dow has at last jumped above the 820-to-869 range in which it had been mired for five months. Said John J. Smith, partner in the brokerage house of Fahnestock & Co.: "The market has finally broken out on the upside, encouraging the bulls."

Broadly Based. The rally was especially impressive because it was very broadly based and accomplished in some of the heaviest trading ever. Turnover on the New York Stock Exchange one day reached 33 million shares, the third highest on record. For all last week volume totaled 141,948,050 shares, the second highest trading week in history.

A large number of trades in blocks of 10,000 shares or more indicated that institutional investors--mutual funds, pension funds, trusts--that had been on the sidelines had strongly re-entered the market. Furthermore, just about all categories of stocks profited from the upsurge. On one day, advancing issues outnumbered declining ones by seven-to-one. Among the big gainers: Du Pont (11% points), General Electric (4 points), Procter & Gamble (5% points) and U.S. Steel (5% points).

Taken aback by the suddenness of the market's revival, some analysts fear that the rally has driven prices above appealing levels, and that a downturn must come. Indeed, it would be astonishing if prices did not slip back soon, at least temporarily, after shooting up so far and so fast. The most prevalent view on Wall Street, however, is that stocks are entering a second stage of a major bull market that, in the opinion of followers of the Dow theory, began unmistakably a year ago. Though the second stage of a bull market usually is characterized by a somewhat more cautious advance than the first, some analysts are predicting that the Dow Jones average could again test 1000 before year's end. Says Harold Jane way, a senior vice president of White, Weld & Co.: "We are not in a runaway bull market with all the speculative trimmings, but we certainly are in a positive environment."

If the market does in fact go on toward its old highs, that could be important news for many Americans besides those who own stock (25 million according to a New York Stock Exchange survey in late 1975, down from 30.9 million in 1970). For the past few years, the market has been performing with great accuracy as a leading indicator of the economy's direction. In late 1973, prices broke calamitously, wiping out some $473.5 billion in stock values over the next year and correctly forecasting the severity of the recession that followed. Then in December 1974, while the economy was plunging toward the bottom of the slump, the market began to turn upward smartly, anticipating the recovery that began last spring. During 1975, prices of shares listed on the New York Stock Exchange rose 38.7%, the second largest increase since World War II, though most of the advance occurred early in the year.

Long Term. Two immediate factors spurred last week's renewed upsurge. One was a firming up of the bond market, where prices have risen and interest yields fallen, making bonds less attractive than stocks to many investors. The other was a one-quarter point cut in the prime bank lending rate to 7% by Cleveland Trust Co., followed a day later by Chase Manhattan. Cheaper credit would spur economic expansion and encourage investors to borrow money to buy shares. But a sustained long-term rally will depend, of course, on the state of the economy.

The current signs are promising. The Federal Reserve Board seems fully committed to expansionary increases in the nation's money supply--a development that economists of the monetarist school believe is essential for a rising stock market. Auto sales in December jumped 39.6% over a year earlier and even exceeded those in the final month of 1973, the industry's record year. The wholesale price index fell .4% in December, indicating a continuing slackening of inflationary pressures, but the nation's troublesomely high unemployment rate remained unchanged at 8.3%.

Improving Indicators. To the indications of an improving economy can now be added the stock market itself. Economists have long debated whether swings in stock prices help to cause recessions and recoveries, as well as signaling them. The general view is that at the very least they have some impact. Among other things, rising stock prices make it easier for companies to raise money, and make millions of people feel richer and more cheerful--an economic factor of no small importance.

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