The stock and bond markets might be setting breathtaking records of late, but when it comes to assessing the current Wall Street boom, experts look only to the past.
That's why market watchers are convinced that the two-month surge in the most closely watched market indicators means the economy is on the way back.
"What the Dow is telling you here is that it believes that a significant change in the environment has taken place and that while evidence of the recovery is not yet in, it will develop and the market is anticipating it showing up in the next three to four months," said a leading stock watcher, Monte Gordon, director of research at the Dreyfus Corp.
Without question, history is on the side of Gordon and the rest of the trading community. The market has been right in forecasting the end of all seven previous recessions since the end of the World War II, with an average lag period of between four and five months.
The most widely followed gauge of stock market activity, the Dow Jones Industrial Average, is up by more than 30 percent over the last two months, and the other key averages, the New York Stock Exchange composite index, Standard & Poor's averages, the American Stock Exchange market value index, and the NASDAQ composite index are up by comparable percentage amounts.
But what does the boom in the averages mean for the 10 percent of the population without work, let alone the average American? How valid a gauge of the health of the economy is the stock market to begin with? And, how valid are these indicators?
Even Wall Streeters recognize that the market indexes may not mean much to the public at large. "It is very true that the man who is out of work couldn't care less about what is going on the stock market," admitted William LeFevre, vice president for investment strategy at Purcell, Graham & Co.
But, on the other hand, the stock market boom might alter the strategy of the firm that laid off the worker. "It helps corporations with their financing, in both the debt market, and in equity financing," said Richard Yashewski, senior vice president at Butcher & Singer Inc.
With interest rates still relatively high, many companies are reluctant to raise capital through debt offerings. But a rising stock market and willing buyers provides an attractive financing alternative.
Further, a perky stock market also sharply boosts the pocketbooks of consumers, economists maintain. According to William Freund, chief economist of the New York Stock Exchange, the market's rally has added about $250 billion to overall consumer wealth--on paper, at least.
"It dwarfs the tax cut," Freund observed. "You are talking about a huge wealth effect. Even for people who don't own stocks, a rising stock market has a way of affecting spending plans."
Though the general public has not been a buyer of stocks during the two-month market rise, they are benefitting from the rising value of the stocks they already hold, stock in the companies they work for and stock held by their pension funds. "It is an important offset to lower home prices and will allow consumers to spend and, hopefully, will allow for economic recovery," said Steven Einhorn, vice chairman of the investment policy committee at Goldman, Sachs & Co.
Above all, perhaps, a surging market improves the national psyche, say Wall Street professionals and others. "When the market is rising, the average individual feels better," said Perrin Long, a brokerage house and market watcher for Lipper Analytical Services. "When the doctor tells you there is nothing wrong, you feel better."
Yashewski, for one, agrees. "The most important factor" coming out of a pickup in the financial markets "is psychological. It is an early sign of life, and that has to loosen up consumers."
But it is also easy for market professionals to find fault with the indicators that provide that spiritual lift, particularly the Dow industrial average. For only four times in the past 23 years, a period of dramatic change in American industry, has the list of 30 stocks that make up the Dow industrials been revised.
For example, there is only one computer stock on the list -- International Business Machines. Six of its stocks are either oil companies or firms that have subsidiaries in the oil business. There are no bank stocks, while International Harvester, the near-bankrupt farm-equipment manufacturer, is a part of the Dow industrials.
The list is overloaded with stocks in cyclical industries, and even with four significant changes in the past three years, it still leans heavily toward the most troubled sectors of the national economy. "No index is perfect," Gordon said, "but you could argue that the Dow is no longer representative of U.S. industry as it now exists."
Nevertheless, the Dow industrial average is the most widely quoted, touted and studied indicator around, and for only one reason -- it's been that way for almost 100 years. "The phrase Dow Jones industrials has become a household term, like Xerox and Frigidaire," said Wayne Nordberg, chairman of the investment policy committee of Prescott, Ball & Turben. "When people think of stocks they think of that index."
Richard McCabe, market analysis vice president at Merrill Lynch Pierce Fenner & Smith Inc., said it is easy to find fault with the Dow industrials, but that, for now, it works. "I like it because it's handy, and it's followed by the people, so it has an effect on psychology," McCabe said. "It's not a perfect indicator. I would prefer a weighted average like the New York composite index."
Most observers, however, agree that the Dow industrial average is a better measure of market activity than it was just a few years ago. The addition of IBM in 1979, replacing Chrysler Corp., helped. So did replacing Esmark with Merck, the drug company, that same year. "The Dow has become a more growth-oriented index," said Nordberg.
The departure of Manville Corp., after it filed its controversial bankruptcy petition this summer, and its replacement with American Express Co., also helped bring the thriving service sector into greater play within the Dow industrial average. American Express, as of a week ago, was the second-biggest two-month gainer among the 30 stocks, gaining 46 1/2 percent, behind F. W. Woolworth's 52.6 percent gain.
For better or for worse, the market and its primary indicators have spoken with assurance over the past two months, with the market only last Friday smashing all-time trading volume records. If the market's postwar record is to stay perfect, the predicted recovery could begin as soon as mid-November, just a couple of weeks after Election Day.