The bull market is five years old today and American stockholders are $2.206 trillion richer, at least on paper.
But as stock prices continue to defy gravity, Wall Steet analysts confess that they do not know when the inevitable downturn will occur. Several prominent market analysts who turned bearish and advised clients to sell their stocks a year ago have watched haplessly as stock prices continue to soar.
Analysts who once explained the market's behavior with neat rules about the value of stocks, interest rates, inflation, the fluctuation of the dollar and the federal budget deficit now say those rules are not quite as helpful as they used to be.
And so they have turned to other explanations for the market's success, including the improvement in corporate earnings, the wave of takeovers and stock buybacks and the flood of foreign money coming into the U.S. stock and bond markets.
Even so, the market's enormous vigor confounds many analysts.
"This bull market will end someday. But I haven't the foggiest idea when that will be," declared Larry Wachtel, market analyst for Prudential-Bache Securities in New York. "It's the staying power of the bull, the ability of the bull to regenerate itself after five years that I find so remarkable."
Wachtel, who has been nose-to-nose with the market for 25 years, thinks stocks are headed higher -- to the 3000 to 3500 level on the Dow Jones industrial average by next year. It is a prediction that would have seemed far-fetched to most market watchers even a year ago but is now shared by many optimistic investment advisers.
The Dow closed yesterday at 2669.32 points, down a modest 11.16 for the day but up 77.32 points in the last three trading days.
Wachtel, who said it is mandatory for him to start his day by checking the financial news wires from Tokyo and London, attributes the current strength of the market to "oceans of liquidity" from domestic and foreign sources -- especially U.S. pension funds and Japanese investors.
"Money sloshing around the globe looking for the best outlet is a new way of life," Wachtel said.
U.S. pension funds dominate the stock and bond markets on Wall Street. The money managed by the 688 largest U.S. pension funds totals $1.084 trillion and grew 22.4 percent last year, according to Institutional Investor magazine.
John D. Connolly, head of investment strategy at Dean Witter Reynolds, believes conditions are ripening for long-term investors to switch from equities to bonds, despite the chance that interest rates will rise, sending bond prices lower.
Because bonds pay a fixed rate of interest, a bond's price is adjusted to keep the bond's yield competitive with more recently issued bonds. Thus, if interest rates rise, the price of the older bond will fall.
Connolly noted that long-term government bonds yield 9 percent and that some middle-grade corporate bonds yield 11 percent, while the dividend yield of the Standard & Poor's 400 stocks is only 2.2 percent.
If the stock market begins to wobble, threatening the gains in stock prices, investors will flee to the bond market, Connolly said.
"Money seeks the best return, and right now the stock market is the hot seat," said Connolly. But the "ultimate question is, how long it will take ... before money is siphoned off by other financial alternatives?"
Connolly said he doesn't know why that switch has not yet happened or why investors are still pouring money into stocks. "All things come to an end," said Connolly, "but if you ask me a precise date, I don't know."
Despite the market's sweeping gains -- stocks are up 210 percent and bonds have doubled in the five years, according to the markets' broadest gauges -- Wall Street observers say there is little sense of euphoria among market participants. Instead, each new market record brings a wave of dire predictions of imminent collapse.
" 'The better it gets, the worse I feel,' has been a good description of the current stock market climate," said Robert J. Farrell, chief market analyst for Merrill Lynch.
Farrell's sense of the market was echoed by Michael Metz, an analyst for Oppenheimer & Co. One of the bizarre aspects of the stock market, Metz said, is the "relentless skepticism of all categories of investors. It's as though they fear that someone will come and take it all away."
If so, there would be a lot to lose.
Since August 1982, when the bull began his stampede on Wall Street, stock prices have climbed almost nonstop, propelled by powerful economic and business forces that have established a new level of value for financial assets.
The 30 blue-chip stocks that constitute the Dow Jones industrial average have risen from 776.92 points to 2669.32 points yesterday, a gain of 243 percent.
One of the most dramatic yardsticks of the market's growth is provided by the Wilshire Index of 5,000 U.S. stocks, which has soared from $1.051 trillion to $3.257 trillion in the last five years -- a gain of 210 percent.
For an individual investor, $100 invested in stocks in August 1982 would have become $345.97 by last month, dividends included, for a total gain of 246 percent, or 28 percent a year, according to the Wilshire index.
Similarly, $100 invested in bonds in 1982 would have become $206.49, for a total return of 106 percent, or 16 percent a year, according to the Merrill Lynch domestic bond index.
Looking back over the last five years, market analysts frequently comment on the new role that corporations have played in the rise of the stock market.
"The most unique characteristic of the market has been the amount of stock retired by leveraged buyouts, takeovers, restructurings and stock buybacks," declared Martin E. Zweig, who writes an investment newsletter and operates the Zweig Fund.
The net amount of stock retired, after deducting new stock issues, comes to about $70 billion a year during the past 3 1/2 years, Zweig said. "It's an absolutely mammoth shrinkage of stock," he said. The effect, Zweig said, was to generate huge amounts of cash that investors then had to find a place for. The stock market has continued to attract much of that money, especially during the period of declining interest rates.
Oppenheimer's Metz said he had been struck by the "continued presence of the corporation as a competitor for stock." He would have expected, he said, to find that as stock prices rose, corporations would sell more shares and expand. But instead, he added, corporations have done just the opposite, cutting deeply into the supply of stock.
In a world in which round-the-globe, round-the-clock financial markets are becoming commonplace, a key worry of many U.S. investors is what will happen to U.S. stocks if the Tokyo stock market suffers a severe retreat.
David E. Nelson, research director at Legg Mason, compared the go-go era of the 1960s, which sent high-tech stocks into orbit and back down again, to the current boom in the Tokyo stock market, where the average price to earnings ratio is between 50 and 60, compared with about 20 in this country. The price to earnings ratio is used by investors to measure a stock's value and is calculated by dividing the price of a stock by the company's annual earnings per share.
Since 1967, the Nikkei index -- Japan's equivalent of the Dow industrials -- is up 20 times in terms of yen, 50 times in terms of dollars. "It is easy to understand why ... many participants are so bullish. After all, for most, this is their first time around. They haven't yet been badly burned by the market. History says they will, but it doesn't say when."
The height of the Japanese market worries Steven G. Einhorn and his colleagues at Goldman Sachs & Co. Einhorn, head of the firm's investment policy committee, recently wrote, "The U.S. relies on a foreign savings inflow. And our equity market has benefited from this inflow."
But this is a danger as well, Einhorn's report notes.
"A large decline in the Japanese market could cause Japanese investors to alter the allocation of their capital flow away from the U.S. shares. The recent wide swings in the Japanese stock market are of some concern," the Goldman Sachs analysts said.
Foreign investors are expected to buy $40 billion to $50 billion of U.S. shares this year, compared with $18 billion last year.