Bullish Round 1 for Investors

But how long will the stock rise and trading surge last?

According to Wall Street folk wisdom, whichever direction the market takes during January will pretty much indicate its heading for the year as a whole. By that standard, which has tended to be surprisingly accurate over the years, 1980 ought to be bullish for investors. During the month that ended last week, every significant measure of investment activity on the nation's two largest stock exchanges rose handsomely, and trading volume soared into orbit.

Not only did the Dow Jones industrial average of 30 of the nation's leading companies climb by a respectable 51 points, to 876 on Jan. 31 (it closed on Friday, Feb. 1, at an even higher 881), but broader measures of investor interest in stocks also showed gains. The New York Stock Exchange composite index, which tracks the prices of 1,500-plus Big Board companies, climbed by a solid 6%, while Standard & Poor's widely watched index of 500 major U.S. corporations rose almost as much.

The really eye-popping gains came on the trading volume that built up during the month, as day after day the number of shares that changed hands soared past 50 million. By month's end the total stood at a staggering 1.2 billion shares, far surpassing the August 1978 record of 865 million. The American Stock Exchange also set a trading record, with 206 million shares moving across its own ticker during the month.

Why all the excitement in the stodgy old stock market, which has yet to make a really convincing recovery from the disastrous losses that followed the go-go years of the late 1960s? Wall Streeters had no end of bullish answers, but mostly they boiled down to a growing feeling among investors that the nation's psychological funk has bottomed out and that under the spur of events in Iran and Afghanistan, a sense of direction and purpose is finally beginning to emanate from Washington. Says Howard Stein, chairman of the Dreyfus Fund, a leading mutual fund investment firm: "There is always a psychological lift from a crisis, and people rise to the occasion." Harold Ehrlich, chairman of the Bernstein-Macaulay investment advisory service, cites a spreading conviction that "the country is moving again, and that means more inflation, more income, more corporate profits and higher stock values."

Not surprisingly, defense-related stocks were among the month's biggest winners. Shares of General Dynamics Corp., the large St. Louis-based defense conglomerate, which is heavily involved in everything from shipbuilding to jet-fighter construction, jumped 8 3/8 points, to 80 3/8. Eager investors also gobbled up stock in Boeing Co., another major defense contractor, which rose from 50 5/8 to 65 1/2. Shares of Lockheed Corp. have climbed sharply as well, as have those of Raytheon, a leading missile manufacturer. Large advances were posted by countless smaller electronics and semiconductor firms, which routinely do much defense-related subcontracting work.

Companies involved in natural resources also performed well. In the past two weeks, as one big oil company after another posted hefty fourth-quarter profits, their stock prices leaped daily. During January, Exxon was up 5 3/4, to 60 7/8, Mobil rose 3 3/8, to 58 3/8, and others racked up equally impressive rises. Coal, timber and copper producers, which like the oil companies deal in irreplaceable or depletable assets, also showed strong gains.

However, the surging prices do not seem to have caught the attention of small investors. Instead of buying shares in companies or mutual funds, in the past year or so they have been investing in so-called money-market funds, which buy short-term securities such as 90-day Treasury bills and pay fat dividends of at least 12%. In the past year, the assets of those funds have swelled from $10.9 billion to $45 billion, which is nearly equal to the assets of the great mutual funds.

To date, the market's big spenders have been cash-rich institutions such as pension funds and the trust departments of banks. More and more their managers are coming to regard stocks as good long-term bets. For one thing, at their present depressed values, at least some blue-chip companies are paying dividends of anywhere from 7% to 10%, making them increasingly competitive with top-quality bonds; utility stocks are offering yields of up to 12%, neck and neck with the money-market funds themselves.

If small investors begin to decide that stocks could be a good hedge against inflation, as they were considered to be before the economic ravages of the 1970s, share prices might really soar. Indeed, with prices of precious metals at astronomical heights and real estate becoming a millionaire's game, stocks are looming up as just about the only investment play still within reach of ordinary people. Says Sidney Lurie, market analyst for Josephthal & Co.: "We believe that the broad stock-price trend is upward, that the boom in collectibles is ending, and that the boom in common stock is just beginning."

What could kill January's newborn bull? Analysts fear that another leap upward in inflation could all too easily force the Administration to reconsider its refusal to impose wage and price controls; such a move, or even the threat of it, would discombobulate business so badly as to frighten away investors. Likewise, further inflation could force the Federal Reserve to push up interest rates further and thus deepen the recession that even the Administration is now forecasting for this year. That in turn could cut into corporate profits and send stock prices tumbling. Last week, in fact, a momentary sell-off actually erupted when rumors circulated that the Fed was planning to raise interest rates again.

For all that, Wall Streeters are beginning to echo a certain heady confidence that the sorry 1970s had seemed to drain away almost entirely. Says Wall Street's Lurie: "I think people in this business have forgotten just how much fun a bull market really is. To me, all those rationalizations not to invest are pointless. We've come through ten years of bad times, this is an election year, the start of the 1980s, a big era, and it's going to be a big market."

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