What history and experts say about stampeding bull markets
| New York
This month the bull market will be eight months old. How much longer can it last? If history is any judge, bull markets can stampede for years. Martin Zweig, publisher of the Zweig Newsletter notes that earlier bull markets have run from 13 months to 39 months. ''They haven't all peaked at the same time,'' he says.
Sometimes political events catch up with the market, causing it to fall, as in 1973 when the Vietnam war ended and the public realized it had to pay for the war. At other times, economic events have intervened, as in 1966 when John F. Kennedy called Big Steel on the carpet to complain about steel-price rises. According to the Stock Trader's Almanac, one proven strategy has been to buy stocks two years prior to a presidential election, then sell the stocks and buy Treasury bills two years after the election.
Most of the bull markets have taken place under Republican presidents. And, as William LeFevre, an analyst at Purcell, Graham & Co., says, the investor's favorite president - from an investment standpoint - was Eisenhower. In anticipation of Eisenhower's election, the markets soared, finally beginning to fall right after his inauguration. Then, the market embarked on a three-year bull run, which finally ended April 5, 1956, in anticipation of a recession. However, by Oct. 22, 1957, the markets began to anticipate a recovery and rallied until John F. Kennedy was sworn in.
Bull markets often move in what are termed ''legs.'' So far, the first leg of the current bull market has pushed the Dow average up about 350 points. Most market analysts have been expecting a ''correction'' of 10 to 15 percent for weeks. However, as Mr. Zweig notes, on average the first leg in a bull market has moved up for 11 months prior to a major pullback.
Not all investors believe such a pullback is necessary. Larry Wachtel, vice-president for research at Prudential-Bache Securities comments: ''Maybe we're thinking too much in terms of the past 17 years. Maybe this is a different ball game. We may be thinking of cycles of the past. Maybe this is the cycle of the future.'' Instead of a correction, he says, ''we may be going through a rolling rotation,'' as investors shift funds among stock groups.
If the market were not to undergo a correction, it would be highly unusual. In normal bull-market cycles, the market runs up sharply in a first leg, and then undergoes a violent series of sessions when it can lose 10 to 15 percent of its advance. Robert Farrell, a technical analyst at Merrill Lynch, has been calling for such a correction for the past two months. In his latest analysis, Mr. Farrell cautions that ''the stock market is overdue for a correction,'' but he refrains from saying when it will occur. One reason why the correction has not happened, says Mr. Wachtel, is because ''everyone has been calling for it.''
During the course of a bull market, investors tend to focus on different groups of stocks. In the first part of the bull market, the emphasis is on blue chip stocks, such as IBM, GE, or Eastman Kodak. In this particular bull market, investors also purchased food stocks, medical companies, and gold issues. As the advance continued, cylic stocks, such as copper, aluminum, housing, and autos became popular. Throughout the whole first leg, high-technology stocks have been on nearly everyone's buy list, since prospects for their growth are excellent for 1984-85.
At this point in the market, Mr. Zweig says, it is getting harder to find undervalued companies, because stocks prices have increased significantly. However, he says, stocks could continue to rise as investors show a willingness to pay a higher price-to-earnings multiple for stocks (a per-share ratio of a company's earnings to its current price). For example, the Standard & Poor's 500 is now selling at 9.4 times earnings. Mr. Wachtel notes that during other periods of low inflation and low interest rates the S&P 500 has sold as high as 15 times earnings.
For the market to continue to rise, Mr. Zweig says, investors must continue to see a period when interest rates stay down, inflation rates remain low, and the economy continues to recover. Mr. Wachtel says he believes the necessary ingredient for a long bull market is a ''long, slow, plodding economic recovery.'' A short sharp economic rebound would kill the market's surge, he says, because investors would become concerned about inflation and interest rates.
Mr. LeFevre, the Purcell Graham analyst, also calls inflation the key. ''At this juncture,'' he says, ''I'm willing to predict the bull market will run until August of 1984.'' At that point, the market, as measured by the Dow average could be at the 1,300 level, he forecasts. Mr. Wachtel believes the Dow could move as high as 1,300 to 1,500 before peaking.
To successfully make money in the bull market, Mr. Wachtel says, requires having a ''feasible game plan and sticking with it.'' Bache's plan has been to buy high-technology stocks. ''We're not interested in the cyclicals,'' Mr. Wachtel says. ''We think the place to be is in the IBMs and high-tech companies.''
Still, at some point in the bull market investors will begin to anticipate a recovery among the battered basics. Steels, mining issues, and machine-tool stocks will take off. Some analysts say these stocks will respond during the market's ''second leg.'' And, then, in the third leg, secondary and tertiary stocks will begin to soar as well, as more speculative investors pile into the market. At that point, some longtime observers of the market say, it's time to move back into Treasury bills.
The biggest bull markets since World War II (Dow Jones industrial average) Dates and approximate Increase in points duration, in months (and percent) Sept. '53 - Apr. '56 (31 mos.) 265 (103.9%) June '62 - Mar. '66 (44 mos.) 459 (85.7%) June '49 - Jan. '53 (43 mos.) 132 (81.8%) Dec. '74 - Sept. '76 (21 mos.) 437 (75.7%) May '70 - Jan. '73 (31 mos.) 420 (66.6%) Oct. '57 - Jan. '60 (26 mos.) 265 (63.5%) Aug. '82 - ? (So far, Dow up approx. 350 pts., 45%)