After nearly five breathtaking years - from Hong Kong to New York - the bull market continues to astonish with its record-setting gait. Talk is now turning to what was once viewed as a pie in the sky projection: Dow 3,000.
Last week, the 2,500 mark on the Dow Jones industrial average was easily trampled. Stock exchanges in London, Sydney, Hong Kong, Mexico City, Madrid, and Oslo also set records.
Indeed, gains abroad are often much greater than the impressive 600-point rise seen on the Dow since January. This 30 percent gain ranks a poor 14th out of rallies on 19 major international markets. This leads some Wall Street sages to suggest that in a global context even a 2,500 Dow is undervalued.
``Stocks here look cheap to foreign investors. Our bull market has been a lagging market,'' says Martin Sass of M.D. Sass Investors Services of New York.
The Dow's close on Friday at 2,510.04 gave it a price-earnings ratio of 13.5 times estimated 1988 earnings. The Nikkei average in Tokyo is 71 times 1988 earnings.
``The US market,'' says Jean-Marie Eveillard, manager of the SoGen International Fund in New York, ``is a better value than the Japanese market. And vis-a-vis Europe it's probably equivalent.''
In April, Tokyo passed New York as the largest market in the world in the dollar value of its shares. But success has soured many money managers on Japanese stocks. ``At these prices, it's a gambling casino,'' says Mr. Eveillard.
Indeed, the Nikkei currently is not setting records alongside other markets. It has slid from a high of 26,000 to around 24,000 in the last month.
Some market analysts worry that equity trading and attitudes are so intertwined worldwide that if the bubble bursts in Japan, other markets will dissipate also. John Connolly, investment strategist with Dean Witter Reynolds in New York, disagrees.
``I don't think the Japanese market is a harbinger of collapse here,'' he says. ``Logically, if the Japanese market goes down, where will the British, Dutch, and Swiss put their money? The next largest market is the US.''
With the Japanese leading the pack, Mr. Sass also thinks foreign investors will be doing a lot more equity fishing in US waters. He notes that two years ago, overseas investors bought $5 billion in US stocks. Last year, that jumped to $18 billion. This year, he forecasts $40 billion.
This latest rally is benefiting from that presence, says Monte Gordon, research director of the Dreyfus Group. ``The first half-hour of trading has been very heavy with foreign buyers,'' he notes.
The basis for this long-running international bull market: lots of money waiting to go into financial assets.
``The market is supported by enormous liquidity,'' says Mr. Gordon. ``Every time it pulls back, money comes pouring in from all over.''
That liquidity stems from many factors, including loose, stimulative monetary policies worldwide; sluggish economies which do not give corporations much incentive to invest profits in new plants or equipment; climbing financial markets which create new wealth; and deregulation with its looser restrictions on where money can be invested.
Of course, heady bull markets also create a fair number of Nervous Nellies who sit on funds anticipating a market collapse. Currently, a hefty 9.4 percent [DL]of mutual fund assets are in cash.
Peter Eliades, editor of StockMarket Cycles, a Los Angeles-based newsletter, considers that liquidity bullish. ``At major market bottoms you see levels of 10 to 13 percent cash. Ultimately, those people are going to stop being so conservative. That cash will go into the market.''
Given the market's height and the foreign-buying tendencies, blue chips will be the primary recipients of new funds, Mr. Eliades says. He expects this to help push the Dow to 3,000 by January 1988. By 1990, he predicts, the Dow will peak at 3,500 to 4,000. Eliades ranks among the top market timers for the last several years. His forecasts rely on cycle theory, which says there are rhythmic patterns of varying durations in the market.
``The important cycle lows are over for the year,'' says Eliades. ``February was the end of a four-year cycle. The intraday low of 2,180 at the end of May was the end of a 12-year cycle. I'd be very surprised to see a move below 2,200 now.''
More traditional technical analysts, however, are warning about the lack of breadth in this rally. Eliades understands their concerns. ``If you look at the daily advance-decline line, breadth is terribly lacking. But we heard the same complaints in September 1985. Within five or six weeks, the Dow moved to all-time highs.''
He suggests that a better indicator of breadth is the market-weighted Value Line composite index, which includes stocks from the New York Stock Exchange, the American Stock Exchange, and the over-the-counter market. This index has moved to all-time highs in recent days, he notes.
Gordon at Dreyfus, relying on fundamental factors, agrees the Dow may be heading for 3,000. But not this year. ``The bulk of the advance for 1987 has been seen. You may see another 100 points on the Dow but that's about all.''