The Reagan years -- start of a long upswing in the Dow?
Boston — Before Now. 4, Joseph J. McAlinden, a stock market analyst, figured the Dow Jones industrial average might rise to 1200 -- maybe even as high as 1500 -- by 1982-83. Now, with the election of Ronald Reagan as president and the strong Republican gains in Congress, the director of research for Argus Corporation dares to talk of the Dow moving to 2500 or 3000 in this decade.
Why the fresh optimism?
Because Mr. McAlinden believes it more likely that a Republican president with some support in Congress will be able to reduce the rate of inflation substantially over the next three or four years.
Indeed, he advises the "average guy" to be "fully invested" in stock -- meaning that he shouldn't be holding out investment mney in the change of the market's dropping lower. "The chances of missing out are just not worth the risk," he says.
Mr. McAlinden sees two types of stock market price movements.
First, there are the normal bull and bear markets, periods of rising prices interrupted every three to five years by sharp price downturns. Another such bear market might occur around 1984, although it is too early to make any precise prediction, he notes. However, he adds, prices at the bottom would likely be above where they are now.
Second, there are long-term cyclical trends lasting perhaps 10 or 15 years. One such trend started in the late 1960s with stock prices moving basically sideways, though fluctuating with the short-term ups and downs of the market. But starting last April, that trend changed, Mr. McAlinden said. "We see a resumption of a long upturn in the 1980s."
This forecast, first made early last summer, was based on the assumption that inflation, though not going away, would probably not get worse. It took account of the business community's gradual adjustment to the high inflation of the 1970 s. Corporations were increasingly "passing through" the trend rate of inflation into their earnings and dividend growth rates. In other words, earnings and dividends were more often rising as fast as inflation. This means that stock prices should also climb.
Earlier this month Mr. McAlinden saw the danger of temporary high interest rates having an adverse short-run effect on the markets. That happened Thursday , when most of the nation's large commercial banks raised their prime lending rates from 14 1/2 percent to 15 1/2 percent. The Dow Jones industrial average dropped 17.75 points, losing more than the 15.96 gain it had made Wednesday when investors traded 84 million shares on the New York Stock Exchange on the news of Mr. Reagan's election.
The Argus Research vice-president is not alone in his optimism. John M. Templeton, president of Templeton Growth Fund Ltd., recently told a conference sponsored by Pensions & Investments magazine that the Dow Jones industrial average has a "better than even chance" of reaching 3000 within the next seven to nine years. He figures inflation and population increases will help double corporate profits in that period. Moreover, share prices will more than double, because the ratio of prices to earnings will increase.
One indication of such a market gain, he said, is that when one bank buys another bank, it tends to pay twice the market value of the shares. Another is companies are buying their own shares in record amounts. A third is that shares are selling at almost record lows in relation to replacement book values.
Obviously, however, not all market observers are that optimistic. Analysts at Harris Trust & Savings Bank, Chicago, for instance, argue that "the stock market is appropriately valued relative to current economic conditions." This conclusion is reached after relating stock prices to an inflation- adjusted measure of after-tax profits. The inflation adjustment is necessary because during periods of rapid inflation, current accounting practices tend to overstate the true profitability of most companies, as inflation produces profits on paper only.
Following this technique, the bank reckons that stock prices were substantially undervalued during the latter half of the 1970s. But the discrepancy has disappeared with the 16 percent drop in adjusted earnings during the past year and a 14 percent rise in stock prices in the third quarter of this year.
"If the increase in corporate profits apparent in recent years continues as the economy rebounds, there will be strong upward pressure on stock prices from present levels," the bank states.
So all three observers are basically optimistic, though in varying degrees.