Heard on the Street From Dow 10000, Bulls Say
Market Could Go Higher
March 30, 1999
By ROBERT MCGOUGH
Staff Reporter of THE WALL STREET JOURNAL
Where do we go from way up here?
Some investors get vertigo peering down from the lofty height of Dow 10000.
But to the standard-bearer of the bull market, Goldman Sachs chief U.S. strategist Abby Joseph Cohen, the horizon looks clear for further gains.
"This is an economy that is doing quite well and we think will support an increase in stock prices," says Ms. Cohen, who marked Dow 10000 sipping tea in her office. "But we don't think that the increase in stock prices will be at the same high rate. We are still quite bullish, but we aren't quite as exuberantly bullish."
She says stocks have the green light unless government, corporations and individuals stop making the "sensible decisions" that have transformed the economy.
Not so fast, bears argue. After all, the previous three times the Dow industrials hit 10000 this month they fell back amid broad concern about the market's level. The bears more broadly look at the sky-high valuations of stocks and come to this conclusion: "Common sense is out the window," says Roy Neuberger, the 95-year-old founder of Neuberger Berman Inc.
The dividing line between bull and bear is simple: Do you focus on the nearly perfect economic fundamentals of the American economy as it races into the 21st century? Or do you pay more attention to nosebleed valuations that, historically at least, have augured trouble for investors?
There's no disputing the facts on either side of
the argument. Even the bulls acknowledge
that, compared with such measures as
earnings or assets or sales, stock prices are at
unprecedentedly high levels. On the other
hand, "the economics of the U.S. are very
good," Mr. Neuberger concedes, "the very
best I've ever seen. And I've seen it now for 70 years."
To the bulls, it's a time of celebration. Dow 10000, says Prudential Securities chief technical analyst Ralph Acampora, is "an awesome number. It's like a beacon for investors, to the world it represents the stock market." Mr. Acampora was laughed at when, in 1995, he predicted the industrial average would reach 7000 -- a point it reached more than a year earlier than he forecast. Now, the bullish analyst is calling for the Dow industrials to reach 11500 by the end of the year.
"This market is defying all the rules," Mr. Acampora says. "What's really driving the market is peace. Nobody's talking about the peace dividend." With the fall of the Berlin Wall in 1989, "it was the first time in years you've had a peace economy."
Analysts and investors who recall the rise in the 1970s of the "Nifty Fifty" growth stocks-and the horrific bear market that accompanied their collapse-find eerie parallels today in the market's focus on a shrinking number of growth stocks. Just like then, the prices of most stocks are actually declining, says Dick McCabe, chief market analyst at Merrill Lynch, but the Dow industrials are rising on the strength of a small number of large, favored growth stocks. Buying the Nifty Fifty "worked for a while," Mr. McCabe says, but eventually "the weak majority infected the strong minority to bring it down," and the Dow industrials fell by more than 40%. Mr. McCabe doesn't figure the market faces such a drastic outcome. But he suspects that Dow 10000 euphoria "is going to be followed by some kind of a letdown," and the Dow industrials may slide back to 8500 or even 7500 before resuming their climb.
But the bulls don't mind that only a small number of stocks are leading the way. "Here we cross a major threshold, and it's solely being led by quality," Mr. Acampora says. The market's focus on a small number of quality stocks, he says, echoes the thriving bull market of the 1950s.
Henry Blodget, an influential Internet-stock analyst at Merrill Lynch, says that "never have there been so many investors chasing so few quality shares." But like Mr. Acampora, he takes the situation in stride: "I firmly believe that prices of stocks are subject to the same law anything is subject to, which is supply and demand." Investors' wholesale shift into stocks from savings accounts and bonds in the past decade "is one of the primary reasons for the continued rise in the stock market-it certainly is true in Internet stocks." Mr. Blodget, 33, came to Merrill earlier this year to replace a bearish follower of Internet stocks. And in general, young investors, unencumbered by fears of the stock-market drought of the 1970s, have been the most enthusiastic: In this market, to paraphrase Wordsworth, to be young is very heaven.
Older investors see things in much darker tones. "I think unless you have a decent correction soon, the outlook is bearish," says Laurence Tisch, 76, Loews Corp. CEO and billionaire investor and longtime bear. "It's very hard to make a case to buy stocks at this level, based on anything historical."
A silver lining in their cloud: Beyond the leaders, there are still cheap stocks to be found and they won't always remain cheap. Mr. Neuberger points to firming commodity prices that have propelled oil and natural-gas stocks from long-depressed levels.
Ms. Cohen at Goldman Sachs argues that the market's superb returns started from a depressed base in 1991. "Our stock market was so cheap when this process began, many people became way too nervous way too soon about valuation," she says. And the improved economy- corporations focusing on high-return businesses, productivity gains and widespread hiring, the elimination of the budget deficit-have warranted further increases in valuation, she says.
What would it take to continue the superb 18% annualized returns the market has delivered during the past 15 years? Gus Sauter, manager of the $82 billion Vanguard Index 500 Fund, warns that it's "virtually impossible" to repeat the double-digit gains investors have gotten, as measured by the Standard & Poor's 500-stock index, for the past 15 years. To do so, he says, price-earnings ratios for the S&P 500 would have to soar from today's roughly 30 times trailing operating earnings-already at record levels-to about 150 times earnings. (The Dow industrials currently trade at 25.6 times trailing reported earnings.) Moreover, dividends are low, and corporate earnings, the third source of market returns, look moderate this year at best. "It's not necessarily an ugly picture," Mr. Sauter says, and stocks could drift sideways for a stretch, but he doesn't foresee big gains. However, this is exactly the moderate outlook proposed in late 1996 by another advocate of index investing, John Bogle, Vanguard's then-chairman-when the industrial average was about 4,000 points lower.
Joseph Battipaglia, head of investment policy at Gruntal & Co., says that corporations' ability to keep remaking themselves-getting out of poor businesses and getting into good ones-can continue to lead to higher valuations for leading companies. "What price do you want to pay for a Matisse?"
Despite the market's impressive rise, pessimists have their own entertaining perspective. John Kenneth Galbraith, professor emeritus of economics at Harvard University and a chronicler of the great stock-market crash of 1929, says that there are "far more people in the market, including mutual funds, than there is intelligence" to go around. Asked about the argument that the U.S. economy has never been better, he recalls famous speculative bubbles of the past: "It has been the common feature of all speculative episodes in the last three centuries that some came forward to proclaim a new era."
The U.S. market may be in "an incipient bubble," says
Nobel-prize-winning economist Paul Samuelson, professor emeritus of economics at Massachusetts Institute of Technology. But he says the market is nowhere near as dangerous and overstretched as the Japanese market was in the 1980s. Japan, of course, has yet to recover from the bursting of that bubble in 1990.
"Economists have no theory of how long a bubble will last," Mr. Samuelson frets. So his advice to grandchildren-the economist is 83 -- is to "develop a philosophical attitude. Any prosperity in a speculative market is lent to you by the Fates, and may have a string on it, and may be taken away."
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