The Bulls' Biggest Month in History

With a final sharp spurt, the stock market last week finished its most explosively bullish month ever. Easily shaking off some midweek profit taking, the Dow Jones industrial average rose 24 points on the last two trading days to close on Friday at 975, its highest mark since October 1973. That brought the rise for all of January to 123 points, the most for any month in history. Even more astonishing was the hectic pace of trading on the New York Stock Exchange: January rewrote every volume record in the Big Board book. The month witnessed the highest turnover in one hour (12.1 million shares between 10 and 11 a.m., Jan. 30) in one day (38.51 million shares, again Jan. 30), in one week (162.2 million last week)--and, of course, in one month. During January 635.9 million shares changed hands, or 39% more than in May 1975, the previous record.

The bulls' rampage was good news for investors--and indeed for everyone. In market almanacs, January is a prophetic month: nine times out of ten, says Wall Street Analyst Yale Hirsch, a strong performance then presages rising prices for the year as a whole. Of broader significance, the stock market, which reflects the hopes, hunches and knowledge of millions of investors, is one of the most accurate predictors of the course of the nation's economy--duly recognized as such by the Government, which officially classes the market as a leading indicator.* Since 1873 the market's upsurges and downturns have preceded by an average of six months the peaks and valleys of the nation's economic cycles; only a few times has it been wrong. Hence January's message was clear: good times ahead. Says David Babson, the Boston financier: "The stock market is saying that people think the recovery will continue, and I see no reason to disagree."

One factor in the market's record for accurate economic prophecies is that they tend to be self-fulfilling. Economists generally agree that the market has at least some limited power to propel the economy. The effect is partly practical: rising share prices enable a company to use its stock to make acquisitions, or sell new shares to get cash to expand. But the biggest lift is psychological. A bull market puts executives in an expansive mood, as the worth of their stock options goes up, and raises the morale of employees, who see the value of their stake in pension funds increase. Consumers who own stock directly or through mutual funds feel richer. If they do not have ready cash, a rising market increases their ability to borrow: readily marketable stock that is going up in price is excellent collateral on loans.

Cheerful Signs. Other indicators are also pointing to a sustained recovery. The Commerce Department reported last week that its index of twelve leading indicators rose .4% in December--with no help from the stock market, which had a flat month at the end of last year. U.S. exports during 1975 ran $11 billion ahead of imports, according to Census Bureau figures, eclipsing the previous record trade surplus of $8.6 billion in 1947. Businessmen and investors are also encouraged by the Federal Reserve Board's willingness to exert pressure to push down interest rates; last week First National City Bank of New York cut its prime rate on loans to business by a quarter point, to 6.5%. Says Howard Stein, chief of the Dreyfus Corp., which has $2.5 billion in mutual funds: "The Fed is finally allowing interest rates to adjust to the needs of the economy."

Given these cheerful signs, the January stock rally seems predictable in hindsight. But in fact, as Stein concedes, "it caught all technicians, including me, completely by surprise." At the beginning of January the expectation of the pros on Wall Street was that the traditional January buying flurry, essentially a technical correction following the tax-loss sell-offs at year's end, would be only a blip on an otherwise flat or slightly downward curve. Instead, an inexplicable renewal of optimism caused a wave of heavy buying, and the running of the bulls into the market began. As prices started to rise, the big institutions, such as banks' trust departments, pension funds, insurance companies and mutual funds, became anxious not to be left behind. They pumped massive amounts of cash into stock purchases, as evidenced by more than 5,000 trades of 10,000 shares or more during January. Meanwhile private investors, who saw their long-depressed shares finally regain a measure of their old worth, were eager to sell.

As a result, the current rally, more than any before, has been dominated by institutions. That explains not only the gargantuan volume but also the suddenness of the price runup. An institutional market tends to be more volatile than one in which individuals do a large share of the trading. Reason: individuals tend to hold their stocks longer. Institutional managers, with nothing to do but watch the tape, trade frequently, knowing that the magnitude of their transactions will enable them to make money on price movements--25-c- a share, say--that are too small to mean anything to the private investor.

Never Again. A sampling of investor opinion by TIME correspondents across the nation indicates that the market is likely to remain dominated by the institutions. Many onetime investors are still too scarred from the market bust of the early 1970s to take another chance. "The Government keeps telling me that the economy is better, and that makes me all the more suspicious," says Harvey Goldstein, a professor of English at the University of Southern California. Los Angeles Advertising Executive Bertram Gader says that the heavy institutional trading frightens him: 'The individual investor has no idea of what is going on and gets the feeling that the market is being manipulated." Atlanta Businessman Dick Fetsko, who lost on past stock purchases, observes bitterly: "There is a new group of investors coming in. Let the market rape them."

Option Entries. Some individual investors are coming back: sophisticated people who can put $100,000 or so into stocks and feel that they can take care of themselves. Those of a speculative nature are plunging into the options market, which is playing the role in the current surge that penny uranium stocks or new issues of young electronics companies did in earlier booms. For as little as 2% of the price of an outright share purchase, the buyer of an option gets the right to buy stock later at a fixed price. If the price of the shares covered by the option rises, he can buy them and sell immediately at a guaranteed profit; if the price falls, he loses only the amount that he paid for the option.

The option market, in the words of Florida Broker Bob Wilde, "has gone crazy." One day last week 158,000 options covering 100 shares each were traded on the Chicago Board Options Exchange, the American Stock Exchange and the PBW (Philadelphia-Baltimore-Washington) Stock Exchange. If all of them had been exercised immediately, it would have added 15.8 million shares to the day's trading in the stocks involved (volume on the Big Board that day was 32 million shares). Since many options do eventually lead to stock trades, some Wall Streeters estimate that as much as a third of the present immense volume on the New York Exchange stems from option purchases made months ago.

Historic High. In past years a rally the size of January's would almost inevitably be followed by a sharp corrective slump. But this time the market is behaving so untraditionally that many analysts expect a continued advance in February, or at worst a minor retreat followed by another rise in the spring. One reason: despite their rapid January rise, stock prices are low by historical standards. As far back as February 1966, the Dow Jones average hit 995; at last week's close, it must be one of the few price indexes in the entire economy that is lower than it was a decade ago. More important, corporate profits are recovering so speedily from the recession that the 30 stocks in the Dow Jones index are selling for an average of a bit less than ten times their companies' expected profits for 1976. The average high price-earnings ratio in the past ten years has been 15. Thus analysts see plenty of room for prices to go up further; some are talking of 1200 or even 1400 on the Dow some time in 1976. They may be getting carried away but, in the present atmosphere, a Wall Streeter who only expects the Dow to break through its historic high of 1051.70, set on Jan. 11, 1973, must be classed as a conservative.

*In presidential election years, the market turns political indicator as well. The rule: if the Dow Jones average is higher on Election Day than on Jan. 1, the party in power keeps control of the White House; if it is lower, the outs win. The rule has held good in 15 of the 18 presidential elections since 1900.

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