Oh, What a Beautiful Rally!

By Charles Alexander

In a frenzy of trading, Wall Street rewrites its record book

Wall Street brokers reported to work last week in a mildly upbeat mood.

The Federal Reserve Board was showing signs of easing its tight-money policy. Interest rates were falling. At long last, it seemed that stocks should look attractive to skittish investors. But no one was at all prepared for the events that erupted: a torrent of trading volume and the swiftest, most spectacular price surge in the history of the New York Stock Exchange.

The Dow Jones industrial average scored its largest one-day and one-week gams on record, finishing at 869.29, up 81.24 points in only five days. The market had its busiest day ever (132.69 million shares traded) and its second busiest ever (95.9 million shares). Before last week's action, daily volume this year had been averaging about 52.3 million shares. The week's total volume of 455 million shares shattered the old record of 329 million set in March. In fact, more shares were sold last week than in the entire year of 1953. Said Samuel Kachel, a broker with Merrill Lynch, who was still answering his phone late on Friday: "I'm tired as all hell. This was an exceptional week."

Exuberant Administration officials saw the rally as a ringing vote of confidence in President Reagan's economic policies and, particularly, the tax-increase bill he pushed through Congress last week. Said Treasury Secretary Donald Regan: "The market forces are beginning to believe our resolve in redirecting the economy. Perhaps it took something like the tax bill to convince people that we're serious about fiscal responsibility." Many Wall Street analysts supported that view. Said Robert Stovall, a senior vice president with the Dean Witter Reynolds brokerage house: "The market was a loaded gun just waiting for someone to touch the trigger. President Reagan and the passage of the tax bill played an important role." Some moneymen cited Reagan's apparent move away from the influence of supply-side economists, who favor tax cuts and play down the impact of budget deficits. Said Donald Trott, a market strategist for the A.G. Becker investment firm: "Increasingly, people in the financial community feel that supply-side economics is voodoo economics. The determination with which the President pursued passage of his tax legislation has sent the message that he is turning to a more conventional policy."

While Reagan's efforts on the tax bill fueled the market surge, the rally was initially ignited by declining interest rates and the stunning news that Wall Street's two most influential pessimists had changed their downbeat tune. The first hint that something extraordinary was about to unfold came on Monday morning. The First Boston investment firm announced that Albert Wojnilower, its chief economist, had revised his economic forecast. After warning for months that the huge federal budget deficit could send interest rates shooting back up again, Wojnilower now admitted that the cost of money would probably continue to decline over the next year. On Tuesday morning, rumors whirled through Wall Street that Henry Kaufman, chief economist of the Salomon Bros, investment house, had also changed his mind on interest rates. Word that these two gurus, known on the Street as Dr. Doom and Dr. Gloom, had reversed themselves electrified the stock exchange. By 10:20, just 20 minutes after the market opened, the Dow Jones industrial average was up almost 5 points.

Salomon Bros, officials, who had been besieged by telephone calls all morning, confirmed at 10:41 that Kaufman was releasing a new forecast that predicted further declines in interest rates. By 11:10, the Dow was up almost 9 points, and the rush to buy was on. Leading the charge were the scores of cash-laden institutional investors, including pension funds, insurance companies and banks, which snapped up stocks in blocks of 10,000 shares or more.

Because few portfolio managers were willing to risk missing a major market rally, a buying panic quickly built up. When the exchange finally closed at 4 p.m., the Dow had risen by a record 38.81 points, to 831.24, on a volume of 92.86 million shares. Exhausted but elated, the traders cheered lustily, tossed confetti into the air and kept the bar at the stock exchange restaurant open until 8 p.m., an hour after its usual closing time. The one-day spurt eclipsed the old mark of 35.34 set on Nov. 1, 1978, when President Carter announced his emergency program to boost the value of the dollar on foreign exchange markets.

The euphoria of Tuesday generated an even more intense trading frenzy on Wednesday morning. In the first hour, the Dow climbed 17.79 points on an incredible volume of 37 million shares, which was 54% higher than the previous one-hour record of 24.1 million. Suddenly, and almost as swiftly, the market swung the other way. Fearing that the rally was going too far and too fast, nervous investors decided to sell and take their profits.

During the afternoon, the Dow lost all its gains and finished the day down 1.81. When the turmoil was over, the 132.69 million shares traded smashed the previous one-day mark of 92.88 million shares, which was set on Jan. 7, 1981, after Investment Adviser Joseph Granville issued his famous warning to "sell everything."

Thursday was another roller-coaster day. In the morning the bulls routed the bears and sent the Dow up nearly 16 points by 1:30 p.m. Then rumors that New York City's Manufacturers Hanover Trust Co. might suffer heavy losses on loans to the Mexican government, which is having serious financial difficulties, helped drive the Dow down 14 points in the next hour. When the report was denied by the bank, the market staged another furious rally, and the Dow ended the day up 9.14. After the passage of the tax bill on Thursday night, the market exploded again on Friday. The Dow roared ahead 30.72 points, on a volume of 95.9 million shares, despite lingering doubts about the Mexican loan problem.

The excitement sparked predictions by some analysts that the rally would at last carry the Dow Jones average above its peak of 1051.70, which was reached in January 1973. Some heady traders were even talking about the start of a "bull market of the '80s." Said Stan Weinstein, editor of the Professional Tape Reader, a market-advisory newsletter: "This is the real thing. The market will trend higher for at least the next two months, and, at a minimum, the Dow will climb back to 1000."

Last week's periodic retreats in the market, though, show that the current delirium is laced with doubt. Investors are nervous because they realize that the new optimism on interest rates grew out of pessimism about the general health of the U.S. economy. Both Kaufman and Wojnilower changed their forecasts because they could no longer foresee a robust economic recovery that would revive business-loan demand and boost the cost of money. Yet, without a strong reversal of business fortunes, the stock rally is likely to be short-lived. Says Monte Gordon, chief of research for the Dreyfus Corp. group of mutual funds: "Markets can respond to interest rates' coming down, but they can mount a sustained upward move only when corporate earnings improve. This is the food on which bull markets feed." Gordon believes that the Dow will rise only to about 900 in the next few months. Richard McCabe, a vice president with Merrill Lynch, is gloomier; he predicts that the Dow will lose all its surge of last week and sink below 780 by fall.

But next month or even next week hardly mattered to weary traders who were relishing the greatest five days in Wall Street history. On a typical Friday afternoon in August, almost all the brokers would have made a quick getaway for the weekend. Last Friday evening, though, the bar of Harry's at Hanover Square, a favorite Street hangout, was jammed with revelers. Said William LeFevre, market strategist for the Purcell Graham & Co. investment firm: "We saw things in the market this week that we never thought would happen." It was a rally to remember, and savor, for a long time.

-- By Charles Alexander.

Reported by Sue Raffety and Frederick Ungeheuer/ New York

With reporting by Sue Raffety, Frederick Ungeheuer

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