New heights on Dow make many happy, some anxious
New York — Not since the 1920s has Wall Street had such a surging bull market. Records have been set day after day: biggest one-day rise, most volume, highest heights.
In 4 years, the Dow Jones industrial average has soared 160 percent. The 2,000 mark was smashed last week. Predictions of a Dow 3,000 or higher are rampant.
But not everyone feels that way. Writing in the current Atlantic Monthly, John Kenneth Galbraith, who wrote a study of the ``Great Crash'' of 1929, contends that the ``market at this stage is inherently unstable'' and points out parallels with the late '20s.
The Great Crash of 1987? Several old hands on Wall Street remember the devastating market crash of 1929 as if it was yesterday. And they find recent events sobering.
``I think we're pretty close to 1929 now,'' warns 90-year-old Philip L. Carret, a respected money manager today, who in 1928 controlled what is now known as the Pioneer Fund.
``Merger mania, leveraged buyouts, and all that nonsense are creating enormous amounts of debt,'' he says. ``I think we're headed for a recession or depression.''
W.E. Hutton, vice-chairman of Thomson McKinnon Securities, says: ``There's an awful lot of speculative froth around. I think we're in a very vulnerable position now, but not for the same reasons as in 1929.'' Hutton, 79, saw ``the tragedy of the crash'' when he started working in his father's brokerage in 1930.
But Robert Rooke, who took his first Wall Street job in 1919, is more sanguine. ``I'm not concerned about a crash. But I am expecting a big correction between now and June, same as we had in 1926.''
It isn't just the ``old-timers'' who are drawing parallels to 1929.
A large chart hanging over the desk of Ralph Acampora, a Kidder, Peabody & Co. technical analyst, shows two remarkably parallel lines arcing upward. One traces the Dow's course in the 1920s; the other shows the Dow in the '80s. The 1929 collapse correlates with 1987.
``I don't know if it's 1928 or '29 or what,'' Mr. Acampora says. ``What I get from the comparison is that this is very much a once-in-a-generation market, in terms of strength and duration.''
Acampora and others point out that a strict comparison would be done on a percentage basis. During the 1920s, the Dow gained nearly 500 percent before tumbling. Such a move today, from its August 1982 low, would have the Dow peaking at more than 4,500.
Some analysts take 100 and 1,000 as starting points on the Dow, and project 3,850 as the top in the 1980s. But Acampora says that's improbable, at least in the next year or two. He predicts the Dow will reach a high of 2,300 to 2,400 this year. ``But it won't be a straight line up. Near term we could see a correction of 5 to 8 percent.''
Those drawing the 1929 parallel point to more similarities than just the stock averages. In the 1920s capitalism was in vogue. The tax-cutting methods of supply-side economics were employed. The Lee Iacocca of the day was Henry Ford - and there was talk of running him for president, notes writer Kevin Phillips.
Then, as today, sentiment for protectionism was strong. But the Smoot-Hawley Act of 1930 is viewed by many economists as disrupting international trade and bringing on the depression.
In 1928, the inability of Mexico to pay $35 million in interest on its debt was a concern. Newspapers of the times show that cuts in interest rates by the Federal Reserve were fueling the stock market.
There was an influx of Ivy Leaguers into Wall Street in the late '20s. Similarly, the lion's share of MBAs go to Wall Street today. And a recent survey shows 50 percent of Yale undergraduates want to work in financial services.
Economist Galbraith says today's wave of highly leveraged mergers ``will eventually be regarded as no less insane than the utility and railroad pyramiding and the investment trust explosion of the 1920s.
``Nothing,'' he writes, ``gives the illusion of intelligence as personal association with large sums of money. ... The mergers, acquisitions, takeovers, leveraged buyouts, their presumed contribution to economic success and market values, and the burden of debt that they incur are the current form of that illusion.''
But there are enough dissimilarities that quite a few Wall Streeters don't think history will repeat itself.
John Templeton of the $6 billion Templeton Group of mutual funds said recently: ``There will be bull markets and bear markets. But I think [a crash on the scale of the one in 1929] is so unlikely that we shouldn't even think about it.''
In the 1920s, the general public was ``up to its ears'' in stocks, recalls Mr. Hutton. It was easy to buy more than was prudent, since margin requirements were much looser. An investor could deposit $100 with his broker and buy $1,000 worth of stock.
Today, margin requirements, fixed by the Federal Reserve Board, stand at 50 percent, compared with 10 percent then. Government agencies and safety nets (bank deposit insurance, social security) have been created since 1929 to prevent the abuses and missteps that produced the market crash and depression.
Paul W. Boltz, an economist with T.Rowe Price, observes that ``over the last 10 years, some sectors of the economy have experienced sharp contractions - notably agriculture, mining, and manufacturing. Problem areas have not been permitted to accumulate into a severe contraction for the whole economy.
``Federal and state regulators have acted prudently,'' he adds, ``to contain problems and not let them strangle the whole credit system as in the 1930s, when the banking system was allowed to collapse.''
Mr. Boltz allows that the United States has ``serious problems, to be sure, but there are no inherent obstacles to their solution.... The possibility of a recurrence of a disaster like the Great Depression is not zero, but it looks too small for a prudent manager or investor to act on.''
Enough investors apparently subscribe to this viewpoint to fuel last week's robust rally. The Dow Jones industrial average clocked a 78.60-point gain by week's end, closing at 2,005.91.
Hutton, and Rooke are all selling into this rally. In his personal portfolio, Carret has gone from 5 percent cash two years ago to 35 percent cash. Hutton went from 10 percent cash last March to 40 percent now.
All three are looking beyond the current euphoria.
``I may be 100 percent wrong,'' says Hutton, ``but if I'm not, I'll be in a position to buy some top-grade stocks after the correction.'' Rooke voices a similar view. And Carret expects a major crash to be followed by a ``Golden Period - the decade of the 1990s. If I was very young, I would buy junk bonds when they hit 3 or 4 cents on the dollar.''