Monday, Feb. 04, 1985
Wall Street's Super Bowl Rally
By John Greenwald
A bitter cold snap set record lows across much of the U.S. last week, but on the floor of the New York Stock Exchange torrid trading advanced market indicators toward new highs. On Monday the Dow Jones industrial average jumped 34.01 points, the eighth strongest gain ever. Next day nearly 175 million shares changed hands on the Big Board; it was the busiest activity since October and the fourth heaviest trading day of all time. Analysts attributed the brisk activity to a surge of optimism about the economy. Said Larry Wachtel, first vice president of Prudential-Bache Securities: "There's a new mood sweeping the country and Wall Street. Investors are convinced that 1985 will be a good year."
The binge continued at midweek when the Dow Jones index jumped an additional 15.23 points, to 1274.73. Suddenly the record of 1287.20, set Nov. 29, 1983, seemed within easy reach, and predictions of a new peak were popping up all over Wall Street. At week's end, though, the Dow closed at 1276.06.
Nonetheless, the sharp run-ups persuaded many experts that the long-awaited second leg of the bull market was at hand. Since surging 64% to 1258.51 between August 1982 and July 1983, the Dow Jones average has been drifting. After an 87.5-point leap during a single week last August, the index finished 1984 in the 1200 range. Analysts last week were confident that the next move would be up. "The Dow will hit 1300 before it sees 1200 again," predicted Peter Furniss, senior vice president for Shearson Lehman/ American Express. David Jones, chief economist for Aubrey G. Lanston & Co., believes the widely watched indicator could reach 1450 by the end of this year.
Such forecasts reflect bullish signs on the economic front. The Federal Government reported last week that business activity was healthier in 1984 than at any other time in recent memory. The gross national product grew 6.8% during the year, for the largest increase since 1951. Inflation, meanwhile, was just 3.7% for the year as a whole, the lowest since 1967. Said Jones: "We may be entering a new golden age similar to the 1960s, when we had both low inflation and solid growth."
Small investors apparently share this optimism. The return to trading by individual investors, who pulled $84 billion out of stocks last year, seems to be a key reason for the market's strength. "You can't get 150 million-volume trading days without the participation of the individual investor," notes Monte Gordon, research director for the Dreyfus Group of mutual funds. Concurs Furniss: "Individuals had been poised on the sidelines, waiting for a signal to jump back in. Now they expect something to happen."
Many small investors have been buying the so-called go-go issues in hightechnology industries. Busy trading in such shares has helped push some stock indexes to new peaks. "If you just followed the Dow," says Prudential- Bache's Wachtel, "you would have missed the parade." Last week both the Standard & Poor's index of 500 stocks and the New York Stock Exchange composite of 1,200 issues reached record highs.
The differences between the various market barometers lead some market watchers to dispute the value of the Dow index altogether. The widely watched indicator consists of stocks of 30 major companies, including IBM, Eastman- Kodak and Minnesota Mining & Manufacturing. "You can no longer tell what 35,000 stocks will do by watching just 30 stocks," says Wachtel. Philip Fernandez, an institutional analyst at Bateman Eichler, Hill Richards, agrees: "The Dow is too exclusive and too narrow."
Banks, pension funds and other big institutional investors were also active during last week's rally. While many banks were closed on Monday in observance of Martin Luther King's birthday, the number of block trades of 10,000 or more shares climbed to some 15,000 for the week, an 18.2% rise as compared with the previous week.
To be sure, the U.S. has some economic worries that could cloud Wall Street's prospects. Leading the list are the twin menaces, huge budget and trade deficits. The trade gap weakens the U.S. economy by diverting American dollars abroad, and the enormous borrowing needed to finance the budget shortfall threatens to push interest rates higher and stunt growth. Says Hugh Johnson, a portfolio strategist for First Albany, a securities brokerage firm: "People went to sleep about the deficit, but they will probably wake up to it this year." Johnson is also skeptical of the current wave of bullish sentiment: "When the prevailing view is one of near unanimous optimism, that is when you have got to be extremely careful."
It is always possible, of course, that last week's market rally was simply the latest example of a well-known Wall Street phenomenon called the Super Bowl indicator. According to popular lore, the Dow Jones industrial average rises in years in which a team from the original National Football League wins the Super Bowl and declines when a member of the old American Football League is victorious. "Its reliability is uncanny," says Shearson Lehman's Furniss. That rule of thumb has been right in 16 of the past 18 years. So when the San Francisco 49ers of the original N.F.L. trounced the Miami Dolphins in Super Bowl XIX on Jan. 20, Wall Street knew it had something to cheer about.
With reporting by Thomas McCarroll/New York