Enough fuel to sustain the bull market?
| New York
Forget about collectibles! Ignore the gems! All the excitement is in stocks and bonds. After years of lying dormant, the stock and bond markets - representing investments in corporate America - have finally started to shine.
Stocks have taken off on one of the wildest bull markets since the early investors gathered around a buttonwood tree at the corner of Broad and Wall Streets to begin trading stocks. At the same time bonds, after sliding in value all through the 1970s, have become a respectable investment again.
According to the New York Stock Exchange, the value of all stocks listed on the Big Board rose from $993.558 billion at the end of July to $1.349 trillion at the end of January, a gain of about $400 billion. Bond prices have likewise soared in value, adding billions as interest rates have come down.
For individuals, the gains have been impressive. On allm the exchanges, individuals - as distinct from institutions - have added $400 billion to their net worth. In terms of the Dow Jones industrial average, the widely watched index has climbed more than 300 points since the surge began in mid-August. It has repeatedly broken new ground, closing above 1,140 in mid-March. The increase is more than 40 percent.
A broader index, the Value Line composite average, has jumped from 118 to 180 , a gain of more than 50 percent. At the same time, bonds have soared in value as yields have declined. For example, the Bond Buyer Index of high-grade municipal bonds has dropped from its high point of 13.44 percent, set on Jan. 14 , 1982, to its current level of 9.22 percent.
But the market's rise has encompassed more than money and numbers. Individuals have suddenly taken note of the stock market again. Cindy Grubbs, an account executive with Dean Witter Reynolds Inc. in Winter Park, Fla., comments that ''we've had a lot more people walk in here who have never invested before trying to find out what the stock market is all about.'' She says that still others who have invested before ''view stocks in a new light.''
The investors who are viewing the market in a new light have become a lot more active in trading stocks. Edwin Hall, director of marketing of investment products at Merrill Lynch & Co., reports that orders from individuals for issues listed on the New York Stock Exchange are up 50 percent from last year at the nation's largest brokerage house. For the over-the-counter stocks, he says, volume is up 250 percent from a year ago.
Monte Gordon, director of research at the Dreyfus Corporation, notes that the bulk of the volume has come from institutional buyers. ''It's not like the feeling of the 1960s,'' Mr. Gordon says, ''where everyone owned stocks and compared notes.'' In fact, studies by Merrill Lynch have found that individual investors were sellers of securities during the market's early rise.
There is no doubt that institutional investors - such as pension funds and mutual funds - have been major buyers during the run-up. Block trades, an indication of institutional activity, soared when the market rose on record volume. And it's likely such activity will continue at least for a while longer. According to Callan Associates Inc., a consulting firm, pension funds have now increased the amount of money they are willing to commit to the stock market. In its latest survey of 113 investment management firms, with assets of $290 billion, Callan found that investment managers expected to increase the amount they were investing in the stock market from less than 57.5 percent of assets in December to 65 percent by the end of 1983.
The run-up in the market, combined with new interest from individual investors, has spawned a new spate of equity mutual funds. According to the Investment Company Institute, in Washington, D.C., some 20 new equity-oriented mutual funds have been formed since the market turned up. At one of these new funds, the Fidelity Mercury Fund, part of the Boston-based Fidelity Group, Richard Fentin, portfolio manager, says new money has been rushing in at a rate of $500,000 a day. The fund, which is an aggressive growth fund, began in mid-January and has already attracted $20 million in new deposits. ''What I hope we are attracting,'' Mr. Fentin says, ''is the 3- to 5 -year players.'' Another Fidelity mutual plan, the Magellan Fund, has become so successful the management group keeps increasing the sales charge attached to it. In fact, according to the ICI, investor interest in mutual funds has been at record levels. Since October, investors have added $9 billion in new funds. At the same time, the funds' assets have soared from $41.4 billion at the end of August to $52.6 billion at the end of January. ''We've never had a period like that before,'' an ICI spokesman comments. To a lesser extent overseas buyers have been attracted by the rising market. The Securities Industry Association's research department figures that since the bull market began, such investors have piled about $1.9 billion into the US stock market. In the third quarter of last year foreign investment fell off considerably, but it picked up again in the fourth quarter. A major portion of this money came from Britain, according to the SIA. Alan R. Ackerman, director of foreign research at Herzfeld & Stern, a brokerage with overseas customers, says, ''The British were wildly bullish, the French were big buyers of the energy stocks, and the Japanese missed the market's move.'' For the longer term, Mr. Ackerman says, many of his foreign clients are ''quite bullish.'' This renewed interest by individuals and institutions in the stock and bond markets has come about for a variety of reasons.
* Investors feel inflation is under control. Arnold Moskowitz, first vice-president at Dean Witter Reynolds Inc., says a major structural shift has occurred that should help to cool inflation. He points to the advent of banking deregulation, which he says removes the burden of inflation from the saver. With inflation down and real interest rates high, he maintains, there are good reasons to save. ''Deregulation of the banking system puts the burden on borrowers, since borrowed money is very expensive.'' He concludes that expensive borrowing slows the economy, which slows inflation.
* Corporations are lean and mean. ''We talk to a lot of manufacturing companies,'' says Mr. Fentin of Fidelity, ''and they have really done the job of cutting down on people and overhead.'' Corporations now have much lower break-even points, he adds, so when they see an increase in sales it will have a much faster effect on their bottom line. Mr. Gordon, however, cautions that the consumer must resume his buying habits for this to help corporate profits. Without new sales, the efficiencies won't turn into higher profits.
* Stock market psychology has improved. Investors are no longer so quick to sell when the market rallies. Mr. Hall at Merrill Lynch says that ''if inflation stays low, you could see the Dow average at the 1,300-1,500 level in 18 months.'' Mr. Hall says investors are no longer afraid of buying fixed-income securities. At Merrill, he says, ''We're setting up as many new accounts for fixed income as we are for equities.'' He says the money market funds have educated the consumer on the choices available.
* Interest rates have remained in a downward trend. The rates have fallen despite government deficits. With a presidential election coming up, analysts don't look for a substantial rise in rates once the economy recovers. Historically, notes one observer, ''the Federal Reserve Board has always been very accommodative to the party in power.''