If 1980 was a good year for stock investors -- and on balance it was -- 1981 should be better.
That is the shared wisdom of most of the analysts who are paid to predict the performance of common stocks, although many say that the early months of this year will be stormier for stocks than later in 1981.
If the first week of the new year is an indication, those storm signs may have to be changed to hurricane warnings. After the Dow Jones Industrial Average climbed more than 40 points to top the 1,000 mark during the first three days of trading this year, stock prices plunged by nearly the same amount last Wednesday and Thursday. There was a slight, 2,99-point recovery. Friday. The Dow average ended the week at 968.99, 4.7 points higher than it started the year.
There was a lot of action for little net change. Near panic-selling gripped investors on Wednesday after a leading market theorist, Joe Granville, suddenly shifted his optimistic forecast and wired clients to "sell everything," the Dow plummeted 23.80 points, and nearly 93 million shares changed hands in the heaviest trading day in New York Stock Exchange history.
Despite the six days of volatility, however, most analysts still think the stock market is a good place to invest for most of 1981.
Even the bond market, which took a woeful beating in 1981, has not been written off by many professional investors, although many now argue that bonds, once thought to be relatively riskless investments, are a chancier course than stocks.
Surprisingly, the analysts are hopeful even though they expect a convergence of economic events that in the past would have spelled doom for investors who keep their wealth in shares of stock in U.S. corporations.
Most analysts except the economy, and corporate profits, to grow at a slow pace in 1981, and many think the first half of the year will be marked by a renewed recession -- the fallout of the high interest rates and tight money policies pursued by the Federal Reserve during the past few months. Interest rates, which apparently peaked for the second time in less than a year last month, won't tumble sharply like they did last spring. High rates will continue to wreck havoc for weeks or months to come.
Inflation, supposedly the country's chief nemesis, will abate somewhat in 1981, but it will still be close to or above the 10 percent range. That is more than twice the pace that existed a decade ago when former president Richard Nixon decided to impose wage and price controls.
"It's not the economic numbers that make me optimistic about the stock market," according to Burton H. Siegel, director of research at the big brokerage firm Drexel Burnham Lambert Inc. "Instead it's the aggregation of a host of other factors that we've been talking about for a number of years but now are coming to a head."
Among the factors Siegel thinks will propel stock prices in 1981 and beyond are a growing interest on the part of foreign investors in U.S. stocks, the return of the smaller investor to the stock market, expectations that the new Reagan administration (and the new Congress) will produce tax law changes that are biased in favor of investment and the realization on the part of investors that stock prices, despite a sizable increase in 1980, still are relatively cheap.
Finally, but far from least important, is the groupthink in vogue among investment managers of institutions such as pension funds that stocks are a good investment. In the past year these managers have increased the portion of pension fund incomes they invest in stocks, and the portion is expected to rise in coming months.
"There is a strong demand-supply bias in favor of owning stocks," Siegel said.
The roller-coaster behavior of the stock market during the first six days of the year, however, should be a caution to investors. Quick profits can be wiped out overnight. Furthermore, even optimists fret that the early months will be difficult going for stock prices, and a sizable minority -- many of them "technical" analysts like Joe Granville who studied historical and statistical data and believes the market has its own internal dynamic that has little to do with the economy at large -- are not convinced at all that the stock market is headed into ecstasy, at least not soon.
Robert Farrell, the chief forecaster for Merrill Lynch, Pierce, Fenner & Smith, said that 1981 will not be a "great year. It will be a disappointment.The record of markets in postelection years is not good."
Farrell, however, is not advising investors to stay clear of stock investments in 1981 but is warning them to be cautious. Although the surge in stock prices that accompanied the post-election euphoria has abated (as has the euphoria), many investors still greet the Reagan victory as a bonanza. In the days before and weeks after inauguration day more of what Farrell calls the "instant gratification crowd" are likely to gravitate toward stocks.
When it becomes clear that President Reagan will face problems that cannot be solved quickly, there will be disappointments that result in declining stock prices.
Nevertheless, although the Merrill Lynch forecaster thinks there will be a market correction during the early months of 1981, he continues to argue that the long-run case for stocks "is fairly persuasive."
If 1980 is a prelude to a 1981, and even a 1982, in which stock prices -- the value of owning U.S. corporations -- outperform those of other assets such as gold as well as the rate of inflation, then 1980 was a good prelude.
Last year the Dow Jones Industrial Average of 30 stocks climbed 14.9 percent, from 838.74 on Dec. 31, 1979 to 963.99 on the last day of 1980. Except for the three months of February, March and April, when interest rates winged up to the 20 percent level once thought unreachable (only to be surpassed last month), stock prices followed a reasonably steady course upward. The vaunted 1,000 barrier on the Dow average was pierced momentarily a few weeks after the November election. Prices fell for the next few weeks, but began to rise again in the waning days of the year.
Standard & Poor's index of 500 stocks, a broader but less familiar measure of stock performance than the Dow, climbed 25.5 percent from 107.94 to 135.52. The New York Stock Exchange's own index rose 25.7 percent. On the American Stock Exchange, where stocks generally are lower priced and represent ownership in smaller companies than NYSE-listed securities, the index rose 41.2 percent. Over-the-counter stock prices, as represented by the National Association of Securities Dealers index, rose 33.9 percent. b
The December price decline (all indexes reached their peaks in November) seemed to dissipate, temporarily at least, a speculative fever that seemed to be growing among investors and that had many Wall Street professionals concerned. When speculation -- the desire to buy stocks merely on the hope of selling them for a higher price -- runs rampant, a crash invariably occurs. A general increase in stock prices followed by smaller general declines usually makes for a healthier overall environment for investing.
It was not only a good year for stock prices in general (as usual, the averages mask the superior performance of some stocks like those of energy companies and the lackluster performance of others), it was a good year for Wall Street.
A record 11.35 billion shares were traded last year on the New York Stock Exchange, compared with the previous record of 8.16 billion in 1979. On the American Stock Exchange, 1.63 billion shares were traded, up from1.1 billion the year before.
Lots of stock trading means lots of commissions for brokerage firms. The Securities Industry Association estimates that the nation's stock firms earned more than $2 billion last year, about twice what they earned in 1979.
But heavy stock trading also generates a big load of record-keeping and order-writing, and several firms were snowed under a blizzard of paperwork, especially during heavy trading in January and February. One big firm, Paine Webber Inc., actually lost money last year because of the heavy cost of coping with the trading blitz at the same time it was trying to meld its operations with those of Blyth Eastman Dillon, which it acquired Jan. 1, 1980.
Foul-ups were so numerous at Paine Webber that it was cited for reporting inadequacies by the Securites and Exchange Commission and was fined $300,000 by the New York Stock Exchange. That was the heaviest fine by far (by $200,000) the NYSE has levied on a member firm. But Paine Webber said it has solved most of its problems and will return to profitability in the quarter just ended.
Paine Webber's experience flew in the face of the general experience on Wall Street, where yearend bonuses were the order of the day. So, too, does an individual stock or industry perform differently from stock prices in general.
If the first few months of the year are not good for stock prices, they may be good for investors. After all, the old adage is to "buy low and sell high." During a period of declining prices some good bargains may be found. Often stocks that reach lows in December -- as institutions shed them before they calculate their yearend portfolios -- do well in the months that follow.
Merrill Lynch's Farrell, who sees a lackluster early in 1981, says his advice is to "be cautious and attentive to values."
Drexel Burnham's Siegel thinks the strength in the market still will be centered in stocks in such companies as petroleum producers, oil service firms and technology companies. Despite recent declines in commodities prices, he thinks the agricultural equipment and herbicide producers will perform well.
Siegel advises that the sluggish economy will hurt companies in basic areas such as chemicals, paper, aluminum and steel. "These stocks will trail the market in general," he said.
While stocks for the most part performed well in 1980, bonds were battered both by high interest rates and by sharp swings in those rates. Historically investors in corporate bonds have put their money in these long-term, fixed-income debt securities because they were less risky than stocks. After all, unless a company runs into severe financial distress it will continue to pay the interest on its bonds and then redeem those bonds at face value when they mature in 20 or 30 years.
But when interest rates go up, the interest rate on an already issued bond does not. As a result, the price of the bond (which usually can be bought and sold like a stock) goes down.
In 1980, more than any previous year in history, interest rates see-sawed and in the process bond prices plummeted, rose and plummeted anew. The cautious investor is no longer a likely candidate for a corporate bond. Companies who rebel at issuing a 30-year security guaranteeing, say, 16 percent interest rates, have shied away from issuing new long-term debt securities as well.
Bond holders lost about as much in the value of their holdings as the average stock investor gained last year.
Bond prices, however, may be a better investment today than stocks. With interest rates apparently on the way down, albeit more slowly and erratically than last spring, bond prices should be on the rise. If the scenario holds true, investors can "lock-in" substantial gains by buying bonds now.
Investors who bought bonds last March, just before interest rates peaked, could have made substantial profits last June and July when the bond market rallied as interest rates plunged.
"This we believe is your second 'last chance' for a historic bond-buying opportunity," according to the investment newsletter Smart Money. Although bonds bear varying degrees of risk -- with Treasury bonds virtually risk-free and certain municipal and corporate bonds much dicier -- all types perform the same way during periods of falling interest rates: They rise in price.
Although the bond market may never be the same again, at least until the nation again finds itself on a course of stable prices and steady interest rates, bonds themselves today could be a more profitable investment than stocks for the investor willing to risk potential defaults (unlikely at the Treasury, more than likely for some firms dependent on severely declining industries) or another shift in the interest-rate climate.