Since April, when interest rates began to fall from their record highs, stock prices have risen sharply.
Although the rally has had its ups and downs in recent weeks, the Dow Jones Industrial Average now is trading in the mid-900s, while five months ago it was trading in the mid-70s.
It is almost written in granite that the rally will continue, with occasional reverses, for several years -- barring a major economic or political catastrophe.
Managers of the major institutions, whose job it is to predict the market and then invest accordingly, are nearly unanimous in their judgment that stocks are a good buy. When as a group the managers of hundreds of billions of dollars of assets concur, their prophecies become self-fulfilling.
"There is still a lot of money around destined to go into the stock market," according to Robert Farrell, the chief market analyst for Merrill Lynch, Pierce, Fenner & Smith. "The last major mistake the institutions made was to own too many stocks just as stock prices became overvalued and the market began to go down." That was in the middle 1970s.
Now, Farrell said, institutions, such as pension funds and insurance companies, own too few stocks. In 1973 institutions had about 73 percent of their assets invested in stocks. By 1978 they had whittled that down to less than 50 percent.
According to surveys of pension fund managers and others, institutions now want to have about 65 percent of their assets in common stocks within the next few years.
Pension funds alone take in $22 billion to $25 billion a year in new money. They already have hundreds of billions of dollars under management. As those big bucks continue to chase stocks, they will chase stock prices upward.
Farrell sees a Dow Jones average at 1,500 by election day. The Dow Jones industrial average closed at 963.74 Friday.
The Merrill Lynch forecaster, who has had an uncommonly accurate record the past several years, foresees the march to 1,500 as a volatile one and thinks there will be a market setback in early 1981.
While psychology may play an important role in the behavior of the stock market (not to mention the bond market, the money market, and the silver market, among others), there are solid "economic" justifications for investing in stocks, as well.
The main one is the relative performance of stocks as an investment during the past five years. Although it is common to bemoan the behavior of stock prices in the 1970s -- the Dow Jones average crossed the 1,000 point in 1973, fell sharply and hasn't been back to 1,000 since, despite an inflation that has sent most other prices through the roof -- stocks have returned an averge of 15 percent a year since 1974 (when price changes, dividends and splits are figured in). That rate of return is well in excess of the pace of inflation and compares favorably with many other investments that have received more attention.
Still, despite the reasonable performance of stocks as an investment, stock prices have not gone out of sight as they did in the early 1970s. Many stocks are selling at or near the book value of the company and some are selling below. That makes them a reasonable buy in the thinking of most analysts and to judge from the surveys, in the minds of the portfolio managers who do the buying.
Burton M. Siegel, director of research at Drexel Burnham Lambert Inc. said, "The long-term case for stocks is good."
But Siegel is not as bullish in the short-run -- meaning the next few months -- as Farrell is. He thinks stock prices will fall in the coming months before rising again late in the year.
The five-month rally in stock prices has been prodded by interest rates, Siegel said. "Forget the election, forget everything else, this has been an interest-rate rally."
Stock prices rise, usually, when interest rates fall, for several reasons, mainly:
When riskless Treasury investments return 13 percent or 14 percent, investors are less likely to take the risks of stock investments for a 15 percent or 16 percent return.
When interest rates are high, it costs more money to buy stocks on margin (that is, borrowing money to buy equities).
As interest rates came down sharply between mid-April and early August -- the prime rate plummeted from 20 percent to 11 percent -- stock prices skyrocketed. Now that interest rates have edged up again, although nowhere near the lofty peaks of last spring, the sustained rally in prices has ended -- temporarily, if the experts are to be believed.
"Investors have got to find other reasons to invest in stocks. Those reaons are there, and investors are sorting them out now," Siegel said.
The economy is stronger. The dollar is stronger. Inflation is stabilizing at the admittedly high level of 9 percent or 10 percent, but even a high inflation rate, as long as it is stable, provides a benchmark off which to base investments.
Nevertheless, while Merrill Lynch's Farrell foresees a Dow Jones average at 1,000 to 1,050 by election day, Siegel sees some near-term decline to about 860 before the market turns up again. Still, the Drexel Burnham analyst said, the Dow Jones will be close to 1,000 by the end of 1980.
"During the next three months," Siegel advises, "buy the stocks you really want to buy."
As usual, the experts are divided on whether any individual stock is a good or bad buy, but most point to a number of groups of stocks that are expected to be good performers in the months and years ahead. They include drug company stocks (although some feel those stocks are slightly overpriced now), hospital supply companies, forest products companies, retail stores and restaurant chains.
But despite the euphoria that has gripped the experts in the last six months, and the near-certain bull market that the group thinks it will produce, investors in any market must be prepared to face volatility.
Not so many years ago, bond prices would change perhaps $10 in a whole year. Today a $10 change can occur in an hour. Interest rates can vault a percentage point in a matter of hours, as well.
Stock prices are no different.
Merrill Lynch's Farrell notes that as enthusiasm continues to wax and as individuals and institutions commit more of their cash to stock prices, investors increasingly will become subject to disappointments that unexpectedly drive prices down for days, weeks or months.
"When everyone had their money in cash, they were expecting bad news. That's why they did not have their assets in stocks. Now they are not expecting any setbacks.
"The big stocks are starting to do better. That's where I'd rather put my bets in a higher-risk environment -- because of the market's susceptibility to disappointment. By election time, I'd be more cautious. The rage to get in small stocks is going to an extreme," Farrell said.
But when the disappointments are behind -- when interest rates fall again, when the economy recovers for sure and when the inflation picture is clearer -- the stock market will be off on what Farrell and other's think is a climb to a Dow Jones Industrial Average of 1,500.
If the experts are right, nearly anyone should do well in stocks in the long-run.
And, perhaps more importantly to those who are less interested in gambling and more interested in the health of the economy, companies may once again be able to sell new shares of stock in reasonable quantities.
That would enable corporations to reduce their debts and upgrade and modernize their facilities, creating new jobs.