The Dow Jumped over the Moon

By Stephen Koepp

Bulls by nature are sprinters who tire quickly. But the breed on Wall Street is displaying the endurance of a marathon runner. The stock-market rally that began more than three years ago is as robust as ever. The stampede, spurred at first by a sharp drop in interest rates, started on Friday, Aug. 13, 1982, with a twelve-point rise in the closely watched Dow Jones industrial average, to 788. The runaway Dow took only six months to close above the 1100 mark for the first time ever and just two more to break 1200. Though the market slowed to a more dawdling pace for more than a year, it came roaring back again last spring. The Dow zipped past 1300 in May, and last week it made history again by crashing through the 1400 barrier. It ended the week at 1404, up 14.

Even though the U.S. economy is trudging along at a slow 3% annual growth rate, investors see plenty of reasons for putting their money on the line. They feel particularly buoyed by declining interest rates. Federal Reserve Chairman Paul Volcker hinted last month that the central bank will continue to apply downward pressure on rates in order to keep the economy moving. Volcker seemed to confirm that policy last week, when he stated that the Fed's open-market committee will keep a relatively loose rein on the money supply, a strategy that should keep plenty of cash available for loans to businesses and consumers.

Investors expect that another boost for American industries will come from the declining value of the U.S. dollar. any companies have had slow sales during the past five years because the overweight U.S. currency made their goods and services much more expensive than products from foreign competitors like Japan. But last week the dollar continued to fall sharply against Japan's currency, dipping to a value of 203 yen in Tokyo, the lowest closing level since February 1981. The decline is already showing some concrete results. Japan's Sony announced last week that it plans to raise its U.S. prices by 5% to 12% on everything from TV sets to magnetic tape. That should make it easier for U.S. firms to compete with Sony, but it is unlikely to leave consumers happy.

Amid Wall Street's glee, though, some investors are sounding alarms. They point out that a large part of the stock-market gain has been caused by the boom in mergers and leveraged buyouts. The massive stock purchases involved in those deals push up prices in general, but the buying is financed by huge loans that could shake the banking system if they go sour. Says Robert Salomon, director of stock research at the Salomon Bros, investment firm: "All this takeover activity is fine and dandy, but let's not forget that we are swapping equity for massive amounts of debt. Some of these highly leveraged companies could find it difficult somewhere down the line." A few analysts think they see the kind of borrowing-and-buying frenzy that could cause a serious plunge in the next few years. Says Mason Sexton, president of Wall Street's Harmonic Research: "The sign is going to be the proverbial speculative fever that makes cab drivers rich."

Despite the whispered warnings, the market's vitality has prompted snorts of excitement on Wall Street, where the bulls are now focusing on an even more momentous goal: the 2000 mark. While the Dow is expected to pause from time to time as stockholders turn their paper profits into dollars, many professional investors think the market will continue its climb, perhaps to 1450 by the end of the year and to 2000 or higher by 1987. Even the cautious Sexton says, "The party will go on for another three years. Make no mistake about it." --By Stephen Koepp. Reported by Raji Samghabadi/New York

With reporting by Reported by Raji Samghabadi/New York