Wall Street's Spring Rally

By John Greenwald

The Dow flirts with 1200 as the bulls continue to stampede

Wall Street last week again let the good times roll. Whenever investors begin wondering whether the eight-month-long rally might finally be ending, the stock market seems to take off on a new record-breaking binge. Last week the Dow Jones average of 30 leading stocks flirted for the first time with the 1200 level. Said Frank Quintana, a Merrill Lynch floor trader who was hoarse from shouting buy and sell orders at the New York Stock Exchange: "The euphoria just keeps building and building. I can't remember a mood like this since August."

By week's end the Dow Jones average had reached new highs in six out of its previous eight sessions. The Dow, which ended the week at a record 1196.30, has surged 419.38 points since Aug. 12 (see chart).

The spring rally has followed a three-week lull that led many analysts to suspect that a long-expected "market correction," or sharp drop, might be coming. Wall Street, however, has weathered a number of such pauses since last summer, and each time stocks have gone higher again. Says Robert Farrell, chief market analyst for Merrill Lynch: "Since August the pattern of this bull market has been four to five weeks of advance followed by two to four weeks of consolidation. There have been four advancing periods and four consolidations."

Money flowing into Individual Retirement Accounts (IRAs) is giving a hefty boost to the latest boom. Consumers poured at least $10 billion into the tax-deductible instruments between Jan. 1 and the April 15 deadline for filing 1982 tax returns. "Our IRA volume has been tremendous," says a Los Angeles fund manager. "It's coming from small investors, and they are providing additional muscle for the market." Notes Edward Yardeni, chief economist for Prudential-Bache Securities: "There's a tidal wave of money coming in through IRAs."

People can put their IRAs into a wide range of investments, including bank accounts, insurance annuities or credit union plans, but many have been attracted by the bull market and gone to Wall Street. At the Boston-based Fidelity Group, for example, consumers put two-thirds of the 35,000 new accounts that arrived during the week of April 15 into stock market funds. Says Susan Clapsaddle, market manager for group retirement plans: "The money just keeps rushing in.' Small investors seem particularly at traded to the market at present. Millions of them stopped putting money into stocks during the long bear market of the 1970s, but now they are back. Many have simply been taking funds directly out of savings or checking accounts and putting it into stocks. Monthly sales of stock funds have been averaging $1.8 billion this year, according to the Investment Company Institute. That is three times the level of 1982. Says Monte Gordon, research director for Dreyfus Corp.: "The influx of cash has been nothing short of an explosion." Gordon notes that IRA money has been rolling into his company's stock funds five times as quickly as into its once fast-growing money-market funds. Adds he: "If that doesn't show the direction investors are taking, nothing does."

The big guys have been moving into stocks too. According to a Merrill Lynch survey of 112 firms, managers of major money pools pumped $11 billion into the market from December through March in addition to switching another $5 billion from bonds into stocks. Last week the number of trades in blocks of 10,000 or more shares reached a robust 11,378 on the New York Stock Exchange, another strong sign of institutional interest. Says Thomas Czech, research director for Blunt Ellis & Loewi, a Milwaukee-based brokerage firm: "All of a sudden everybody's afraid not to be buying stock."

The economy, to be sure, has finally been providing some encouragement to investors. The Commerce Department reported last week that the gross national product grew at an annual rate of 3.1% during the first quarter, the sharpest increase in two years. While the gain was less than the 4% Government economists had predicted earlier, it still indicated that the recovery was on track.

Other reports out last week also showed that the economy was moving toward a steadier course. The Commerce Department announced that consumer prices in March rose .1%, an annual compounded rate of just 1.6%, while personal income increased .6% in the same month, the largest gain since November. Indications that corporate profits are beginning to pick up buoyed investor confidence (see box).

Perhaps the most encouraging sign of all has been the continued evidence that interest rates are unlikely to bounce up again any time soon. Some economists had feared that the price of borrowing money would jump once recovery started, but so far this has not happened. The prime rate, which stood at 14 1/2% last August, has been 10 1/2% since late February. Wall Street was particularly heartened last month by Federal Reserve Chairman Paul Volcker's statement that he expects interest rates to keep falling. Says Steven Einhorn, chief portfolio strategist for the investment banking firm of Goldman Sachs: "Volcker's remark gave an important boost to the latest stock surge."

The spring rally has made winners out of an unusually wide range of stocks. Shares of oil companies, automakers, retailers and financial institutions have all been among the leaders at different times. Market analysts have also been encouraged by the rally's blue-chip quality. The list of big winners includes companies like IBM (up 88% since August), General Motors (up 64%) and Chrysler (up 256%).

The investment pace has been so hectic that some observers are beginning to detect dangerous signs of panic buying. "All those people who had been waiting for a correction have now thrown in the towel," asserts Michael Lipper, president of Lipper Analytical Services, a leading Wall Street advisory firm. "That's why they're now buying blue chips. They're simply not taking the time to look for good, small companies."

Still, not everyone is eager to leap into stocks. Some investors continue to hang back out of fear that the economy will prove weaker than experts now predict. Says David Jones, senior vice president of the brokerage firm of Aubrey G. Lanston: "This is a case where the market is only reading the good news it wants to hear." The bad news that Jones sees is the runaway federal deficit, which might range up to $200 billion in the coming fiscal year. High deficit spending could lead to heavier federal borrowing that would drive interest rates back up again. A few individual investors are also having second thoughts. Early last year, Stanley Reed, 33, a Brooklyn landlord, invested more than $5,000 in stocks. Reed had planned to borrow and plunge further into the market, but now he no longer wants to take the chance. He intends to wait instead for the market to fall and then transfer some additional savings into stocks. Says he: "I'm holding out for a correction, but there's no question that I will switch once it comes, because I'm expecting another bull run after that." The latest rise has persuaded some analysts that the best of times may now be over. They argue that the biggest bargains have already been snapped up. Says Prudential-Bache's Yardeni: "So far this market has made everyone look like a genius, but from here on in it is going to be tougher to pick winners." --By John Greenwald.

Reported by Adam Zagorin/New York and Don Winbush/Chicago

With reporting by Adam Zagorin, Don Winbush This file is automatically generated by a robot program, so viewer discretion is required.