A Bang-Bang Birthday

By GEORGE J. CHURCH

As parents know, a birthday party for a five-year-old is usually marked by wild noise, frantic rushing about and manic exuberance. Even so, there have been few such events as boisterous as the one on Wall Street last week. Growing at a pace that once would have seemed impossible, the bull market that was born five years ago last Thursday showed off its muscles by rampaging past one historic high in stock prices after another.

It was a week-long stampede of amazing force. The time required for the Dow Jones industrial average to get from one 100-point mark to the next highest used to be measured in years, then months, then, in early 1987, two or three weeks. But after vaulting past 2600 on Monday morning, the average briefly pushed past 2700 only three days later, on Thursday afternoon, and again on Friday before pulling back a bit to close at 2685.43. Nonetheless, at that level it posted a record gain of 93.43 for the week. The irrepressible market took in stride news that the trade deficit rose 12%, to a towering $15.71 billion in July, and it was buoyed by a report that wholesale prices increased at an annual rate of only 2% last month. Stock-trading volume was enormous; Tuesday's New York Stock Exchange turnover of 278 million shares was the second biggest ever.

But perhaps the most impressive aspect of last week's commotion was that it was not all that unusual -- not by current standards anyway. There have been many weeks of nearly equal, and a few of even greater, frenzy since the bull was born. What is truly stunning is the cumulative effect of all those bang- bang weeks. At Friday's close the Dow Jones industrials had zoomed up more than 1900 points over five years; prices of the 30 stocks in the average had multiplied roughly 3 1/2 times from the Dow's low of 776.92. on Aug. 12, 1982.

In percentage terms, the 246% jump has been exceeded three times: by a 496% run-up in the eight years before the 1929 crash, a 371% recovery from 1933 to 1937 and a 355% climb between 1949 and 1961. But all those bull markets rose from far lower price levels; in dollar terms there has never been anything remotely resembling the current market binge. The Wilshire Index of the combined value of 5,000 stocks has climbed $2.2 trillion in the past five years, equal to half the U.S. gross national product of $4.4 trillion.

In another way, too, the current bull market is unlike any in the memory of the most seasoned stock traders: there has never been one that has whirled up so fast for so long with so little interruption. Nothing so far has been able to stop the bull. Not worries about gargantuan budget and trade deficits. Not a sharp drop in the value of the U.S. dollar between 1985 and mid-1987. Not even the stock-market equivalent of the law of gravity, specifying that the most rapid advances ought to be broken now and then by a substantial downward correction in prices.

"I have never seen a market like this," says Donald Stone, a member of the New York Stock Exchange since 1950 and one of its vice chairmen. "The market has spiked up without any meaningful correction; it won't even pause to catch its breath." Peter Cohen, a New York City real estate broker and large investor, muses, "Even in the sizzling '60s, it was an article of faith that what goes up must come down. But those who have played by this rule now have left huge amounts of profit on the table. I have sold at a profit, then bought the same stock at a higher price, then sold it again at still a better price several times."

To many brokers and investors, it is all getting rather scary. How long, they ask, can the market keep going up and up in a straight line? After all, as one of the oldest of all Wall Street cliches puts it, "Trees don't grow to the sky." Peter Furniss, a managing director at the brokerage firm of Smith Barney, Harris Upham, chooses a different metaphor. Says he: "It's like a college frat party. The music is loud, and everybody is having a wild time. But sooner or later, the cops are coming to bust up the party."

Nervous professionals point out that dividend yields on many stocks are averaging only around 2%, while some types of bonds pay interest of 9% or more. Right now that disparity is being more than offset by the big price gains in stocks, but there is always a chance that many investors will be tempted to switch their money out of corporate shares and into interest- bearing securities.

Another fear is that stock prices have risen to a level that cannot be justified by companies' prospective profits. By one estimate, the stocks in the Dow Jones average are now selling at 20 times expected earnings this year. That is high, but still below the multiple of 22 in 1962, on the eve of a market crack.

A sure signal of a coming collapse is supposed to be frenzied buying of stock by small investors. The little guy, or so goes the theory, always comes into the market at the worst possible time. Small investors seem to think so too: they are pouring money into mutual funds, but the majority are not doing much direct buying. Says Alfred Johnson, chief economist of the Investment Company Institute: "Small investors don't want to go head to head with the wily institutions."

Consequently, even those troubled by vague worries that the market cannot go straight up forever generally think that the rise can and will be prolonged for a while yet. Furniss says that before the cops break up the party, "I would not be surprised if we reached 2800 ((on the Dow)) within a week and 3000 next month." Many others believe the surge could last another year or even longer. Some reasons:

Rising Corporate Profits. Growth in the gross national product is slowing a bit from an already lackluster pace: it rose 2.9% last year, after adjustment for inflation, and is expected to increase about 2.5% in 1987. But many companies are at last getting the benefit of the painful plant closings, layoffs and other cost-cutting moves they have carried out over the past few years; they are increasing earnings sharply without any big rise in sales. Profits of all U.S. corporations other than banks jumped 22% in the second quarter and are likely to rack up further sizable gains for the rest of the year; if so, price-earnings ratios could look a bit less lofty. Says Mary Tomanek, a broker in the Northbrook, Ill., office of E.F. Hutton: "I think the market is going up because of good earnings, quite simply, and will continue to do so for that reason."

Foreign Buying. A startling $16.8 billion poured into the U.S. stock market from overseas in just the first five months of this year, more than the total for the four full years from 1982 through 1985. The Japanese alone are expected to buy $12 billion to $15 billion worth of U.S. stock this year, four to five times their purchases in 1986. The big drop in the dollar made American stocks seem relatively cheap to West European and Japanese investors, but for years they held off from buying, fearing that further currency depreciation could wipe out any profits they made. Now the dollar has rebounded a bit from its lows, and that inhibition is gone. The Japanese have an additional incentive: on the Tokyo market many stocks are selling for 50 to 70 times earnings and are yielding 1% or less in dividends. U.S. stocks look both better paying and less dangerous. The flood of foreign cash has its less attractive side: it could dry up as rapidly as it began, and even if it does not, many Americans resent the idea of foreigners buying up big chunks of U.S. industry.

Supply and Demand. As cash has funneled into the market from overseas and from such domestic sources as mutual and pension funds, the supply of stock available for public purchase has steadily dwindled. By one estimate, shares worth nearly $29.2 billion were removed from public trading in the first half of this year. Essentially, this trend is a hangover from the merger mania that fed and was fed by the bull market in its early stages. Acquisitions have taken the stocks of such corporate giants as Gulf Oil and RCA off the trading floors. Leveraged buyouts by big investors taking once public companies private have further shrunk the supply of shares. Now major companies are buying up their own shares at a record pace to keep them out of the hands of potential raiders. The pressure of rising demand on a shrinking supply is having its classic free-market effect: higher prices.

Psychology. A surprising number of big investment institutions sat on the sidelines early this year, holding bonds or cash while waiting for the supposedly inevitable stock-market correction. Now they are scrambling to join the party while it lasts, lest their clients accuse managers of missing out on all the fun and profit. Thus, to some extent prices are going up in August because they went up in June and July. That trend could be drastically reversed at the first sign of a downturn, but for the present it is giving the market a powerful push.

Another prop under the surging market is the widespread expectation that the economy is likely to enjoy some further, though modest, expansion. The - business advance that began in late 1982, shortly after the birth of the bull market, is reaching late middle age by historic standards. Since World War II there has been only one, during the 1960s, that lasted longer. Nonetheless, the consensus among Government, business and stock-market economists is a prediction of slowly growing production, rising corporate profits, a fairly small increase in inflation and relatively stable interest rates at least through most of 1988. One somewhat cynical reason often cited on Wall Street: the Government will pump enough money into the economy to keep production growing through a presidential-election year.

A final reason may be the bull market itself. The effect of stock prices on the broader economy is a subject of considerable dispute: the market has collapsed during business booms and skyrocketed during recessions. But some economists believe in what Allen Sinai, chief economist of Shearson Lehman Bros., calls a "positive feedback loop": a rising economy spurs stock prices, which in turn help to prompt further business growth.

Though most of the $2 trillion rise in equity values has been paper profit, some of it has been cashed in by sellers of stock and has found its way into purchases of houses, cars, jewelry, and college educations for children. In addition, many households have borrowed against their stock holdings. The more important effect probably is psychological: people who see the value of their investments rise feel richer and freer to spend. Though the stock market is often thought of as a kind of casino for the rich, an estimated 50 million Americans, or more than a fifth of the entire population, participate in the market either through direct ownership of shares or through interests in mutual funds, pension funds and the like. Many investors who were not especially wealthy in 1982 have now joined the ranks of the rich; the long rally has created an estimated 2,500 to 5,000 new millionaires.

In theory, at least, a bull market makes it easier for businesses to raise money for expansion and modernization by selling new stock. That effect may be muffled because big companies have run up worrisome debts either carrying out acquisitions or fighting off takeovers. But smaller firms are raising huge amounts of cash by selling their stock to the public for the first time. In just the first seven months of this year, once private companies raised $17.4 billion through initial public offerings, or two-thirds more than in the same period of 1986.

Not many economists feel brave enough to try to put numbers on how much the bull market has helped the economy. Those who do so think the effect has been modest but appreciable. Says Barry Bosworth, of the Brookings Institution: "Studies indicate that about 4% of the increase in the value of the stock market over a two-year period is reflected in consumer spending." Given the spectacular increase of the past two years, that would be a tidy sum -- enough to trouble Bosworth, who thinks the economy is more in need of savings. Sinai of Shearson Lehman calculates that the present bull market has added a half to a full percentage point to economic growth in each year since 1982. If so, last year's GNP growth of 2.9% would have been only 1.9% to 2.4% without the bull's assistance.

The market boom has had some less happy effects too. It is widely blamed for prompting mergers and takeovers that create paper profits but make no economic sense, and for tempting corporate managers to focus on moves that will pump up tomorrow's stock prices to the detriment of long-range planning. Yet on balance it has probably done a lot more good than harm. Just as the market can rise when business is down, production, jobs and profits can grow during a market retreat. Only it is a lot harder that way.

With reporting by Thomas McCarroll and Raji Samghabadi/New York, with other bureaus