Wall Street's Super Streak

By Charles Alexander

No one predicted it. No one can explain it. No one dreamed that it could keep going day after day after day. But last week Wall Street continued on one of the most unbelievable stock-trading binges in financial history.

The frenzy has broken records, and then broken them again. After an unprecedented 455 million shares were traded on the New York Stock Exchange in the five days ending Aug. 20, an even more spectacular 550 million shares changed hands last week. Before the current rally, the stock exchange had never had a 100 million-share day. Last week trading volume topped that magic mark four consecutive times. The peak of 138 million shares on Thursday shattered the one-day record of 132.7 million that had been set only eight days earlier. Average daily volume before the current spree had been only 52.3 million shares. Says Donald Iseman, a partner in the Neuberger & Berman investment firm and a stock trader for 36 years: "I remember when volume was 1 million shares on a good day. If anyone had said that we would some day do 100 million shares, I think that he would have been institutionalized."

The direction of the surge has been up and down, but mostly up. Since the advance began, ironically on Friday, Aug. 13, the Dow Jones industrial average has gained 106.55 points, to 883.47. Says Greg Smith, director of research for the E.F. Hutton brokerage house: "We think the market has turned and could rise another 25% in the next year."

Investors across the U.S. are caught up in the excitement. "Sitting on money was no fun any more," says Steven Geringer, vice president of a Nashville organization that helps schools with fund-raising drives. "Everybody wants to gamble again." Complains Scott Stern, an executive for an Atlanta firm that owns bowling alleys: "A few weeks ago my broker called me three times a day with stock tips. Now phoning him is like trying to call an airline in December." Because shareholders suddenly feel richer, the stock rally could help boost consumer spending and give a lift to the entire economy.

For the brokers who work the floor of the Big Board, the past two weeks have been as exhausting and exhilarating as a triumphant run in a marathon race. Never have they logged so many miles rushing between the buzzing telephones along the walls of the exchange and the bustling trading posts in the middle. Never have the stock prices, which are flashed in green on the electronic tapes overhead, surged, dipped and surged again with such stupefying speed. Never have so many big deals been executed one after another. "It feels like you can never get done," says Harry Buonocore, a floor broker for the Pershing securities firm. "You have 25 things to do at the same time, and you forget who you are." The rewards, though, have been well worth it. "I am giving away more business to other brokers than I usually do myself," exults James Reynolds, an independent floor trader.

Despite the delirium, however, nagging questions remain: What, if anything, do the sound and fury in the stock market signify? Why the incredible, almost insane, trading volume? Is this a suckers' rally or the beginning of a sustained bull market? Why has the momentum been so strong when the prospects for economic recovery are so uncertain?

Sudden moves in the market have often come at dramatic turning points in the course of economic policy. On Nov. 1, 1978, the Dow Jones average gained 35 points after President Carter unfurled a dramatic plan to shore up the value of the dollar in international commerce. On Oct. 6, 1979, the Federal Reserve Board announced a historic policy change by adopting a more monetarist approach for controlling the U.S. money supply. That had the immediate impact of sharply boosting interest rates. Within a week, the Dow dropped almost 59 points.

Two weeks ago, many investors sensed that another economic watershed had been reached. Inflation had slowed dramatically, interest rates were falling and Congress finally passed a $98 billion tax-increase bill designed to reduce worrisome budget deficits. Suddenly there was strong new hope that Reaganomics might work to pull the American economy out of its stagnation.

Even so, the market is still edgy and extraordinarily volatile. Persistent fears about the future of the economy have restrained the bulls from running free. After jumping 22 points on Monday of last week, the Dow average plunged 16 points on Tuesday. It rose 17 on Wednesday and Thursday and then dipped 9 on Friday. For the week, the Dow was ahead by 14 points.

The market showed an amazing capacity to absorb bad news. Before trading opened on Thursday, Manville Corp., the largest U.S. asbestos producer, unexpectedly announced that it would reorganize under the protection of the federal bankruptcy laws. Manville's business operations are still sound, but the company has been overwhelmed by lawsuits from thousands of people claiming to have suffered serious health problems because of exposure to asbestos. Even though Manville stock was one of 30 that make up the Dow Jones industrial average, the market shrugged off the firm's troubles, and the Dow gained 11 points in the first hour of trading. Dow Jones quickly said that American Express Co. would replace Manville in the blue-chip index starting this week.

Later on Thursday, one of Wall Street's most stubborn bears, Analyst Robert Farrell of Merrill Lynch, suddenly sided with the bulls. He predicted that the rally would last for seven to eight weeks and perhaps take the Dow to 950. Previously, he had forecast a peak in the index of no more than 870 this fall.

The brokers, who have been saying for the past five years that the market was oversold and that stocks were the best investment value around, want desperately to believe in the rally because their business has long been in the doldrums. From its alltime peak of 1051.7 in January 1973, the Dow average fell to a low of 577.6 in December 1974. Since then it has bounced around, but it almost always seemed stuck under the 1000 milestone. The Dow broke through to 1024 in April 1981, but three weeks ago it stood at just 770. During those years of the bears, millions of American investors pulled out of Wall Street and began putting their cash into money-market funds, real estate or gold. In 1970, households held 38% of their financial assets in the form of stocks. By the first quarter of 1982, stocks accounted for only 21% of those holdings.

Big institutional investors, including pension funds, insurance companies and bank trust departments, are normally heavy buyers of stocks, but in recent months even they had been shunning the market because high interest rates made other investments more attractive. They parked much of their cash in Treasury bills, bank certificates of deposit and other short-term investments that offered safe returns of 11% to 13%. In a survey done in midsummer, Martin McKerrow, a vice president of the A.G. Becker investment firm, found that the typical pension fund was holding only 49% of its assets in stocks, compared with 66% five years ago.

Since late July, however, interest rates have been falling sharply and the return on many short-term investments has dipped below 10%, making them increasingly less attractive as an alternative to stocks. When Henry Kaufman and Albert Wojnilower, two of Wall Street's most respected forecasters, predicted two weeks ago that interest rates would decline further in the coming year, institutional investors had the signal they had long been waiting for. In a rush of panic proportions, they bought stocks as they never had before. For the past two weeks the number of block trades of at least 10,000 shares has averaged more than 1,600 per day. Last year the daily volume of such trades was only 575. Says Becker's McKerrow: "Clearly, many portfolio managers were afraid of being late and missing an event." Kenneth Holland, who manages an $11 billion trust portfolio for New York City's Chemical Bank, says that he responded immediately to Kaufman's new forecast by buying $1 billion worth of stocks (see box).

The institutional investors were able to move so fast in part because of the impressive wizardry of modern technology. Historically, the complexities of managing multimillion-dollar portfolios containing dozens or even hundreds of stocks have made the big funds hesitant and often slow to follow market trends. Now, however, managers can press a few keys on their desktop computer terminals and find out instantly how any stock in their fund is doing at that moment, how the total value of their portfolio is changing, what is happening to all the shares being traded on the exchanges and where the bargains are. These big bulls of the bull market then move quickly to make very large transactions. It is primarily this ability to make snap decisions and then act fast that has helped generate the huge trading volumes.

Though institutions have powered the rally so far, many individual investors are deciding to take their chances on the Big Board once again. Buy orders are starting to pour in at retail brokerage offices. Says Keith Kretschmer, manager of the Los Angeles branch of the Bear, Stearns investment firm: "The institutions started this rally. But now I think everyone else is coming in, and the advance will keep going."

The upswing has shown unusual strength across the entire spectrum of stocks being traded. Blue-chip shares favored by institutions, including IBM, Sears and AT&T, were the early prime movers. Since then, the enthusiasm has spread to the stocks of smaller companies. The price of National Medical Enterprises, which operates a chain of hospitals, has risen 32% in the past two weeks. Apple Computer has gone up 47%. When the Dow Jones average of 30 blue-chip industrial stocks retreated temporarily on Tuesday last week, many second-tier stocks kept on climbing. As a result, the advancing stocks on the Big Board outnumbered the declining ones by 701 to 561, despite a 16-point drop in the Dow.

The American Stock Exchange and the over-the-counter market, which deal in relatively small firms that are favorites of many individual investors, also scored brisk gains. Even the petroleum stocks, long depressed by the oil glut that is driving down energy prices, got a boost last week following reports that Iraq had bombed Iran's Kharg Island oil port. On the day the news broke, the price of Union Oil of California, for example, rose nearly 10%, to $27.

As furious as the rally has been, the potential pool of money that could flow into the stock market has hardly been tapped. "There are still some institutions and many individuals who haven't returned to the market but are waiting to see if the rally is for real," says William Goldstein, executive vice president of the Burton J. Vincent, Chesley & Co. investment firm in Chicago. "We believe that the market has nowhere to go but up." One gigantic horde of cash is the $227 billion stashed away in money-market funds. Says Steven Einhorn, investment strategist for the Goldman, Sachs brokerage house: "We are going to see more and more individuals turn to the stock market, because the yield on the money funds is coming down so dramatically." Last week these investments earned an average return of 10.4%, compared with 12.2% only a month ago.

So far, though, the money-market funds have not been losing cash.

In fact, their assets rose by $3.7 billion last week. Says Joseph DiMartino, president of Dreyfus Liquid Assets, one of the largest money funds: "The individual investors we have attracted tend to be savers. They want to avoid risk and preserve capital." Most investors remember that the Dow Jones average first touched 1000 in 1966. If stock prices are adjusted for inflation, the Dow would have to reach at least 2000 merely to equal its 1966 level. For many, it will take more than a two-week flurry to erase the memories of more than a decade of declines and losses. Says David Logan, 60, a retired real estate developer in Chicago: "I'm not jumping into this market. I'm selling in this market and would advise anyone else to do the same. This is one of those times when you can't see very far ahead."

Some brokers admit that there is a streak of euphoric irrationality in the market's response to falling interest rates. The cost of money has plunged mainly because sluggish sales, mass unemployment and an alarming rate of bankruptcies have dried up loan demand. Unless the economy rebounds vigorously, corporate profits will not be strong enough to sustain higher stock prices. Warns Jay Goldinger, a broker with Cantor, Fitzgerald in Beverly Hills: "The economy is really much worse than anyone wants to believe. This rally is a trap. The market is reacting to lower interest rates like a voracious dog at its 4 p.m. feeding. The bowl is out, but there's nothing in it." Goldinger is the rare broker who is advising his clients to hold on to their cash.

As always, the market is trying to look beyond the economic trough to the recovery beckoning in the distance. Historically, stock rallies have often foreshadowed economic upturns by six to nine months. But many brokers fear that this recovery may prove to be a mirage. Says Richard Atlas, manager of Goldman, Sachs' Los Angeles branch: "There are still some very major problems. You can't expect to pull strongly out of a recession as long as housing, autos and agriculture, three of the most important industries in the U.S., are in a depression."

False rallies have occurred many times in the past. In early October 1974, during a deep recession, the Dow Jones average was languishing at 585. Then a decline in interest rates sent the average shooting up 90 points in a month, to 675. Just as suddenly, however, interest rates bounced back up a bit, the rally fizzled, and by early December the Dow had plummeted nearly 100 points, to a twelve-year low of 578.

Though concerned about the severity of the recession, the financial community hopes that the troubles will at last wring rapid inflation out of the U.S. economy. More than any other factor, rising prices have been responsible for steep interest rates and sagging stock values over the past ten years. Says John Redmond, a stock trader for Fowler & Rosenau: "If inflation were to be licked, a Dow of 2000 would no longer be out of the question." In the back of every broker's mind, however, is the fear that federal budget deficits, which even after passage of the new tax-increase bill threaten to top $100 billion annually over the next few years, could unleash inflation once again.

But there was one group of Wall Streeters with unreserved confidence about the future: the officials and technicians of the New York Stock Exchange. In two historic weeks, they have faced their greatest challenge and prevailed. During the notorious stock market plunge of 1969, when the Dow Jones index fell 199 points in seven months, the Big Board was so over whelmed by paperwork that it was forced to close trading two hours early every day.

Harried clerks in brokerage-house back offices worked night and day to cope with the deluge. Though average share volume seemed enormous at the time, it was about one-tenth the level of last week.

Since that disastrous period, the stock exchange has spent some $70 million on eleven separate electronic systems to relay orders to trading posts, record sales and provide swift and complete information to brokers on how the market is moving. That costly investment paid some blue-chip dividends last week. The record-breaking torrent of trading was handled with ease. Even at the peak of the action on the 138 million-share day, the electronic tapes that list every single trade were a mere 18 minutes behind. It was all a bully good show. -- By Charles Alexander. Reported by Sue Raffety and Frederick Ungeheuer/New York

With reporting by Sue Raffety, Frederick Ungeheuer

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