Slugfest at the Dow-Jones 1,000 -- does it signal bully times ahead?
Boston — It's trench warfare on Wall Street. Each day last week and this week, the Dow Jones industrial average poked its nose above the 1,000 level. Most days stock sellers fired away heavily enough to force this average of major corporate stocks to duck back under 1,000.
But many in the financial community now believe that investors are rousing the courage to mount the trench walls and push stock prices onto new ground.
"The market is being spurred by the conversion of the skeptics to the bull market thesis," comments Mark Tavel, research director for Value Line Investment Survey, a top-ranking market advisory firm.
Many investors have instructed brokers to sell if the Dow passed 1,000. Some institutions, such as mutual funds and pension funds, have unloaded stocks whenever the market advanced sharply. But recently the optimists have been winning. The market stayed above 1,000 at the close of trading Tuesday. It advanced 19.09 points Wednesday to its highest level in over eight years, closing at 1,015.22, before dipping Thursday by about 9 points. Now there is considerable speculation that the Dow will pass its record 1,051.7, reached in January 1973 when President Nixon announced the Vietnam peace agreement. (Measured by broader price averages, such as the New York Stock Exchange, stocks have not yet surpassed their highs of last fall.)
"We are in a snowball kind of thing -- the higher the market goes, the more money is drawn into it," said Mr. Tavel. "That could work for a time."
Experts say several elements are fueling the Dow's surge:
* There is widespread hope that President Reagan will improve the investment climate with tax cuts for businessmen and stockholders and a lower inflation rate.
* Compared to their historic price levels, stocks remain a bargain. Stephen Sanborn, Chairman of the investment policy committee of Standard & Poor's, noted that the average pirce was about nine times earnings for the Standard & Poor's 500 stocks. Considering that over the long-term, this ratio of price to earnings has run about 11, Mr. Sanborn views today's so-called P-E ratio as "not an unreasonable figure at all."
* Interest rates should decline in the next few months, making stocks more attractive. Some forecasters have predicted that interest rates will edge up again in the summer or fall. But it is doubted that any rise will match recent peaks.
* The economy and corporate profits are expected to turn up later this year.
* The ability of the market to withstand selling pressures in recent days could be building what analysts term a new "base" for further price advancement. "It is very exciting and of psychological importance," said Sanborn, who adds that he's "a little more bullish."
John Wintrop Wright, head of a Bridgeport, Conn., investment advisory service , guesses that stocks could be lower two months from today, but "markedly higher" a year from now. Robert H. Stovall Sr., director of investment policy for Dean Witter Reynolds Inc., speaks of a "testing area" with the possibility of the Dow exceeding its all-time high soon.
But observers also point point to several factors that might take the shine of the market's recent performance.
One is the historically large gap between the return on bonds or short-term money market instruments and that received from dividends on corporate stocks. Sanborn notes that his firm's average of 500 stocks was yielding less than 5 percent through dividends. By comparison, good quality bonds yield 13 percent and three-month Treasury notes about 13.3 percent. Those high rates tempt investors to stay out of the stock market.
Other "bearish" factors include continued high inflation, the signs of an economic slowdown, and the expectation of poor corporate earnings on average during the first half of this year. Sanborn said his economists were forecasting flat earnings this year; but his stock analysts were talking of a 10 percent gain in corporate earnings.
Mr. Wright notes that the market averages have, almost without exception, declined in the first year of a new presidency, especially a Republican president. And as a rule, when the market declines in January, as it did this year, it ends the year dowon or not up significantly. But, of course, such patterns can be broken. Tavel advises investors to "look for investment over the longer term -- towards mid-decade." By then, he suspects, stocks prices may be twice as high as today, adding "You can buy good quality stocks cheap now."