HOW MUCH IS LEFT IN THE BULL MARKET?

By GEORGE J. CHURCH

TREES DON'T GROW TO THE SKY" IS the way generations of stock-market traders have rephrased the proverb, What goes up must come down. But that ancient bit of sententiousness is out of favor on Wall Street today. To be sure, no one quite dares to predict that after more than eight years of almost vertical ascent since the Crash of '87, share prices can keep going up forever. There are some signs of nervousness that one of these days a financial version of the law of gravity will reassert itself, as evidenced by last week's 94-point drop in the Dow Jones industrial average, to 5536. But majority opinion is that such drops will turn out to be only the latest of many fleeting downdrafts. Most analysts, rightly or wrongly, rate the risk of bailing out of the market too soon, even at these heights, as greater than the risk of hanging on too long. There is, they think, some bull left.

Reason: baby boomers are rewriting all the old rules. Many are past the expenses of buying a house and raising a family. They are thinking of retirement and worrying that future Social Security and corporate pensions will be inadequate. So they are putting their spare cash into stocks on a gigantic scale.

Buyers of mutual funds alone put $129 billion into the stock market last year, about $10 billion more than 1994's gargantuan inflow. By no coincidence, the Dow average jumped 33% during the year, surpassing both the 4000 and the 5000 levels; never before had two 1000 marks fallen in the same year. This January alone, mutual funds took in $33.3 billion in net new cash and invested $28.9 billion of it in stocks, 76% more than in December and 57% more than in January 1994, which had set the previous record. Result: the Dow climbed 10% from the start of the year to its 5630 close on Feb. 23, as big an increase as some analysts had expected for the whole year.

The money so far has kept pouring in even while prices temporarily went down. Wall Street used to regard a 10% "correction" as standard after an especially sharp and rapid advance, but the Dow has not had even a temporary downswing that large in the past five years. Huge as it seemed in points, last week's drop came to only 1.6% of the index total.

Why? One reason is that a big chunk of the money flowing into mutual funds--more than half of it in the case of Fidelity Investments, the nation's biggest fund group--comes from retirement plans like 401(k) savings funds set up by corporations to pool their workers' contributions. "With 401(k)s, regardless of what the market does, people are plowing in their money week after week, fortnight after fortnight, month after month," notes Robert Brusca, chief economist of Nikko Securities, a Wall Street firm. Once a worker designates a certain portion of his pay to be set aside and put into stocks, the 401(k) keeps investing the same amount unless the worker changes his contribution. And such investors take longer to change their mind than those who play the market directly.

Even baby boomers who invest in mutual funds individually, however, have so far looked on market drops as an opportunity to buy rather than sell. Says Hugh Johnson, chief investment strategist of First Albany, a securities firm: "The new wave of investors really doesn't know what risk is. Every time we get a minor break in stock prices, Americans simply keep plowing more money into even overvalued stocks in the hope that stocks will become even more overvalued." That is a polite restatement of what used to be known as the one-more-idiot theory: a speculator could safely pay what he knew because there would always be "one more idiot" to buy it at an even more outrageous price.

Most investment managers think the market has not yet reached that manic stage. Standard measures present at worst a mixed picture. Dividends are averaging only 2.2% of stock selling prices, far below the average of 3.6% in the past 20 years. Yet prices, by one measure, are only 18 times that of corporate earnings, close to long-term averages. Other calculations yield different numbers, but price-earnings ratios are all well below the level, 22, before the 1987 Crash.

Also, while money continues to pour into the market, the net supply of buyable shares keeps shrinking as a result of mergers and acquisitions and companies buying back their own stock, even in the midst of a new-issues boom. Allen Sinai, chief economist at Lehman Bros., thinks stocks are "at the upper end of the fair-value range" but not yet beyond it, and sees room for the Dow to gain another 300 to 400 points.

There are enough dissenters, however, to create a tug-of-war that lately has sent the Dow careening through wild swings within the same day. Last Friday was a striking example: the index in midmorning had dropped 49 points, but then it rallied to close up 51 on the day.

What might finally shut off the money spigot would be a sharp and sustained rise in interest rates. (Or even a widespread expectation of one: stock prices often react not to what actually happens but to what some investors think other investors believe is going to happen.) That might push some of those investors now pouring dollars into stocks to seek a safer and higher return in bonds or even CDs.

The conventional wisdom is that the opposite will happen: the Federal Reserve will keep reducing interest rates to prevent the present economic slowdown from turning into a recession. Dissenters, though, think the economy will revive enough to resurrect Fed fears of inflation and cause it to change policy. In fact, bond-market traders recently interpreted some ambiguous remarks by Fed Chairman Alan Greenspan that way and bid up bond interest rates, touching off last week's stock drop. How much further any correction may go, and how much more prices may rise if the market turns around again, are thus even harder to gauge than before. With an unprecedented Niagara of cash flooding into the market, all the usual rules are off. Aren't they?

--Reported by Bernard Baumohl and John Moody/New York

With reporting by Bernard Baumohl and John Moody/New York