Bulls Are Stampeding Again

By John S. DeMott

Hopes for lower interest rates send the stock market on another rampage

Even after a red-hot, record-setting summer on Wall Street, last week's performance on the New York Stock Exchange was still stunning. Following the 125-point increase from 777 during the last half of August, the Dow Jones index of 30 leading industrial stocks had hovered at the low 900s. But then came rumors last week that the Federal Reserve Board had voted to ease up on its tight-money policy. True or not, the stories were enough to send the market into a new runaway rally. The Dow exploded for a 79.11-point weekly gain, closing at 986.85, the highest level in 15 months.

Trading volume was staggering. Some 488 million shares changed hands, the second highest level in history. On Thursday, trading reached 147.1 million shares, surpassing the daily record of 137.3 million shares set only seven weeks ago.

The latest market rally started on Wednesday, when the Dow index rose 37 points, the second highest daily gain ever. On Thursday morning, the most casual ticker-watcher knew that something extraordinary was happening when volume on the Big Board exceeded 43 million shares in the first hour. That would normally be considered moderately heavy business for an entire day. By 1 p.m., three hours after trading began, volume had reached 96 million shares, straining even the exchange's new computerized tape system.

At the 4 p.m. close of business, exhausted traders went wild. They blew whistles, tossed sheets of paper into the air, slapped each other on the back and behaved like teen-agers cheering for their high school football team. The industrial index was up almost 21 points for the day. Friday's volume was nearly as heavy, 123 million shares, and the Dow Jones index rose an additional 20.88 points.

It was a broad-based rally led by the blue chips: the biggest gainers were large established corporations. American Telephone & Telegraph, the most widely held stock in America, gained nearly 4 points during the week. Other major winners were IBM, Eastman Kodak and General Electric. General Motors saw its stock rise 3 1/2 points to 50 3/4, a yearly high. Bank stocks also increased, including those of Chase Manhattan, Citicorp, Bankers Trust and J.P. Morgan. Even Johnson & Johnson managed to get some relief from its Tylenol headache. At week's end it closed at 42 5/8 and had recovered about a third of what it had lost after the scare began.

The surge was led by institutional investors, as banks, pension funds and insurance companies gobbled up 10,000-share blocks of stock last week at a breathless pace. There were also signs that smaller investors were jumping back into stocks after forsaking them for years in favor of high-yielding money-market funds and other interest-bearing instruments. Said Kenneth Holland, an executive vice president of New York's Chemical Bank: ''A lot of individuals have joined us in the second leg of a bull market that started in mid-August."

Part of last week's rally was caused by investors looking for places to put about $31 billion from All Savers Certificates that are maturing this month. Since those one-year experimental savings instruments may no longer be available after this year, people want a new place to park their funds. Some of the money is finding its way into blue-chip stocks. Worried foreign investors also poured cash into U.S. markets out of concern about political and economic stability abroad.

The strongest impetus behind last week's rally, though, was a growing feeling among investors that the Fed has fundamentally shifted its tactics in attempting to bring down interest rates. It is doing this by easing up on the money supply and lowering the discount rate that it charges banks to borrow. Last week the Federal Reserve lowered that rate to 9.5% down from a peak of 14% a year ago.

The most visible sign that rates are declining is the prime, the bench-mark rate banks charge corporate customers. About midweek most major banks dropped that rate from 13 1/2% to 13% At week's end the Mellon Bank in Pittsburgh lowered it to 12.75%. In late July the prime was generally 16%.

Several banks, including Chemical, Bank of America and Citibank went a step further last week and lowered rates to ordinary consumers on auto loans and unsecured credit lines. These traditionally decline more slowly than the prime Chemical Bank lowered it new-car loan rate 17% from 18 1/2% and home improvement loans to 17 1/2% from 19%.

Moneymen based their expectation of lower rates on news about last Tuesday's meeting of the Federal Reserve's Open Market Committee, which sets interest policy. The Wall Street Journal reported that the group had voted to let the money supply expand more rapidly than the Federal Reserve had originally planned. In recent weeks, money growth has significantly exceeded the Fed s policy goals. Only a few months ago, analysts had expected that the Federal Reserve would rein in rapid expansion and keep money tight. But the Fed's policymakers now seemingly want to allow the money supply to grow faster in order to bring down interest rates and help speed recovery. With rates dropping and an economic upturn in prospect, professional investors saw stocks as the right place to put their money.

Does the boom in stock prices and volume mean the beginning of the long-delayed, and long-promised, bull market of the '80s? Or was it an upward surge before a steep decline?

Most stock market analysts are hedging their bets. Not since the mid-1960s his any rally lasted more than a few months What is more, there is little in the way of economic news other than the drop in interest rates that would appear to justify investor confidence now. Housing and autos have shown no significant signs of revival, US. factories are still running at less than 70% of capacity, retail sales are sluggish, and unemployment in September reached a 42-year high of 10.1%. Otto Eckstein, chairman of Data Resources Inc., and a member of TIME's Board of Economists, said, "The economy continues to be mired in recession" and is "moving sideways at best."

Stocks were not the only good investment last week. Bond price's also rose smartly, in one of their sharpest single-day rallies in history: prices usually go up when interest rates fall. This led to hopes that corporations might soon be able to turn some of their estimated $500 billion in high-interest, short-term debt into longer-term bonds with lower interest rates. Such moves would ease pressures on company earnings and free up more money for capital investment.

Gold and silver prices often go up as interest rates go down. Reason: low interest rates make it more attractive to hold precious metals because money-market accounts and other such instruments are offering lower yields. Last week the metals continued to follow that pattern. The price of gold went up $31 an oz. to $433 while silver rose 68-c- to $8 98

Despite last week's euphoria, one problem continues to worry many financial analysts: the Federal Government s huge borrowing requirements. The US Treasury must raise nearly $16 billion to $17 billion in new funds within the next month. That is far more than the $1.2 billion in new corporate bonds announced for the next four weeks. Washington's need for credit may put upward pressure on interest rates and be a damper on any recovery.

Nonetheless, some Wall Street analysts believe that the Federal Reserve has become so concerned about the generally weak economy that it will push through a looser money policy. The Fed, which is usually expansive in an election year can be expected to reflate even more "' says Morgan Stanley & Co.'s Richard Schmaltz. Says Analyst Robert Farrell of Merrill Lynch: "For the market at this juncture, bad economic news has become good economic news."

To Stanley Shopkorn of Salomon Bros., the true riddle of the economy at this point is whether the market is seeing a real business turnaround, or "merely reacting to the Federal Reserve attempts to create one." Out in America's mines, ills and factories, the mood remains dark. Many businessmen have been crushed by two years of economic stagnation, foreign competition and a shrinking U.S. industrial base. It will take more than rising stock prices or election-year easing on credit by the Federal Reserve to convince them that the long economic winter is finally over. --By John S. DeMott. Reported by Frederick Ungeheuer/New York

With reporting by Frederick Ungeheuer

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