Americans Are Richer As Security Prices Soar
ON paper, if ownership of stocks and bonds were spread evenly between every man, woman, and child in the United States, each individual would be worth roughly $10,000 more this week than at the start of the year.Skip to next paragraph
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That number provides some idea of the magnitude of what Michael Flament describes as ''once-in-a-generation gains'' for these financial assets. Investors are enjoying ''the greatest expansion of wealth for the US securities markets for any year in history,'' notes the senior vice president of Wright Investors' Service, a Bridgeport, Conn., money-management firm.
The value of all US stocks rose $1.75 trillion to $6.75 trillion so far this year. Bonds are now valued at $5.6 trillion, a rise of $900 billion, Mr. Flament calculates.
Economists point out that securities wealth is concentrated in the hands of the well-to-do.
Nonetheless, in 1990 some 51 million individuals owned stock, either directly or through mutual funds invested in corporate equity, the last survey by the New York Stock Exchange found. With an extended bull market since then, that number likely has grown. Moreover, millions more own stock indirectly through pension plans or tax-deferred annuities.
''It has been a fabulous year for bonds as well as for stocks,'' says H. Bradlee Perry, a consultant to David L. Babson & Co. of Wellesley, Mass., another money-management firm. ''It has been a vintage year, not likely to be soon repeated.''
The Standard & Poor's 500 stock index is up 34.7 percent as of midweek, approximately 37 percent if dividends are included. That increase is about the same percentage as in 1975, and somewhat less than the 43 percent rise in 1958 and 52 percent increase in 1954 (including dividends). This year's stock market performance was also beaten in 1927 and 1928, before the crash of 1929, and in 1933 and 1934, coming out of that crash.
What makes this year exceptional, according to Flament, is that both stock and bond prices have had a ''fantastic year.'' The total return on long-term US Treasury bonds (coupon plus capital appreciation) is 28 percent so far in 1995. Bonds thereby reversed their 1994 losses of a similar magnitude.
To many analysts, the stock market's extraordinary gains owe much to the fact that the yield on long bonds has declined 2 percentage points this year, pushing up the price of existing bonds and offering less competition to stocks for investor's money.
Mr. Perry sees some ''big surprises'' in the performance of stock groups. ''Dull'' bank stocks, spurred by takeover fever, have jumped 55 percent, beating even flashy high-tech stocks. The stock of Chase Manhattan Bank is up 82 percent, outpacing the 49 percent gain of Microsoft Corp. Even diversified insurance stocks, with a 50 percent gain, match technology stocks. Drug stocks are up 58 percent, soft-drink issues 52 percent.
Other factors pushing up prices were corporate acquisitions and repurchases by companies of their own stock; these exceeded new issues of stock by more than $100 billion this year, reducing the supply of stock. Further, individual investors poured $100 billion into stocks through equity mutual funds.
The big question, of course, is ''what next?''
''It is undoubtedly wise to lower our sights for the immediate future,'' Flament's boss, John Winthrop Wright advised in a speech scheduled to be given yesterday to the New York Society of Security Analysts. ''Nevertheless ... investors in high-quality securities can look ahead with confidence to the securities markets in 1996-97 and longer term.''
''Investors have got to get accustomed to single-digit [or] 10-percent returns,'' Flament says. ''But that is plenty of reward. It compounds nicely over the years.''
He says one measure of the real value of stock, the current ratio of stock prices to earnings, is ''still reasonable.'' But he notes that the 20 percent surge in corporate profits this year, an element in the extraordinary stock price gains, is past. Profits next year are likely to go up at a single-digit rate, he predicts.
Stock prices ended 1994 at just under 15 times that year's earnings, Perry notes. At the present, the price-earnings ratio is about 16.7 - about the same as in the mid-1960s when US Treasuries yielded about 5 percent. They now yield 6.07 percent.
A big hazard for stocks would be recession. Most economists say it won't happen in 1996. A few economists disagree.