The boom has resounded in stock markets around the world. Since last fall a ferocious global rally has swept share prices to record-shattering highs, piled up billions of dollars in paper profits and spawned a mood of excitement and greed that is attracting more and more small investors. But in the past few weeks there has been a growing feeling of uncertainty—a jittery sense that share prices have risen too high, too fast. The debate now raging among sophisticated market players —and neophytes, as well—is about when the inevitable break in share prices will come. Stephen Jarislowsky, for one, president of the Montreal investment firm Jarislowsky, Fraser & Co., insisted last week, “The market has definitely been overpriced since the beginning of the year.” He added: “We are selling all the stock that we consider overpriced. There is always some fool who wants to buy it.”
Still, even the experts who are calling for a drop in stock prices say they
do not think that the current fouryear-old rising “bull” market is over. In North America, the underpinnings of the stock surge—modest economic growth, declining interest rates and falling oil prices—have not changed. Said Sherry Atkinson, chief economist for the Toronto investment firm Burns Fry Ltd.: “The rally is real and it is both fundamentally and economically sound.” Instead, market watchers expect what is known as a “correction”— a downturn that will temporarily knock back the value of high-flying shares. Emile Tasikas, a stockbroker with Toronto-based brokers Midland Doherty Ltd., says that there may be a correction of between five and 15 per cent. But, he said, “that kind of correction does not phase me at all. We still have a long way to go in this bull market.”
But the guessing game over just when the adjustment might come has led to unpredictability and wild swings on North American stock exchanges. On April 30, the Dow Jones index of leading industrials fell by a record-set-
ting 42 points to 1,784, while the Toronto Stock Exchange’s (TSE) composite index of 300 stocks dropped 37 points to 3,079. Analysts attributed part of the slide to “program trading”—computer-based programs that are increasingly used by institutional investors to decide when to sell certain stocks. But some brokers also said they suspected that anxious stock-market players had suddenly panicked and sold their shares. Last week Henry Kaufman, the influential managing director of New York’s Salomon Brothers, warned that the exhilaration in the world’s financial markets has a “dark side.” He added, “The unwinding of speculation contributes to quick and dramatic market reversals.”
North American markets were hit by another wave of selling last week as some cautious investors concluded that overvalued shares were about to take another tumble. The TSE ended the week at 3,066, down 59 points over the previous two weeks. “We want to protect for our clients the large profits they have achieved in the past two
years,” explained Michael Simms, a vice-president of Toronto-based brokers Nesbitt Thomson Bongard Inc.
Most analysts date the current bull market from about August, 1982, soon after the Federal Reserve Board in the United States ended a two-year-long antiinflationary campaign by easing interest rates.
As the prime rate fell— it had peaked at 20.5 per cent in August, 1981 — the current economic recovery got under way.
Investors began to shift money away from interest-paying investments such as term deposits and investment certificates. They switched into stocks and bonds, lured by the possibility of earning spectacular capital gains, and the new demand caused prices to rise. Although the bull market stalled from the fall of 1983 until the summer of 1984 and again last August, the general trend has been up. The Dow Jones industrial average has risen from 779 in August, 1982, to an all-time high of 1,856 last April 21. The TSE 300 Composite Index climbed to a record high of 3,129 last April 18 from a level of 1,613 in August, 1982. Said Barton Biggs, strategy director for the New York investment house of Morgan Stanley & Co.:
“We are in the midst of the bull market of a lifetime.”
In the past year the market surge has spread from North America to exchanges around the world. The stock exchange index in Tokyo is up 19.6 per cent since January, and the French, British and West German markets have all repeatedly set new records in the past year. As the European Community experiences a full-scale industrial revival spurred by lower inflation, rising profits and stable governments, investors are flocking to snap up shares in long-undervalued companies. In France, the market has been buoyed by the return of a right-wing government and a plan to denationalize banks and industrial companies.
American and Japanese investment money is also flooding into West Germany, which has the third-largest economy in the industrial world after the United States and Japan. Three weeks ago the industrial conglomerate Feldmuehle Nobel easily raised $1.2 billion—the biggest stock offering in
the country’s history. In Britain, the Financial Times’s index of 30 bluechip stocks listed on the London Stock Exchange has risen by 40 per cent in the past 12 months. Some brokers in
the City, London’s fabled financial district, are now predicting a correction that is expected to last three to four months—followed by a return of the bull.
In North America one of the most dramatic features of the bull market has been the interest in mutual funds,
which permit people to pool their money to make investments. With interest rates on bank savings accounts, government and guaranteed investment certificates in decline, small investors are increasingly entrusting their cash to the professional money managers who operate mutual funds. In the United States during the first three months of
1986, American investors poured $49.7 billion (U.S.) into the funds, up from $19.5 billion (U.S.) in the same period in 1985. According to the Toronto-based Investment Funds Institute of Canada, which represents about 160 of the country’s 275 mutual funds, Canadians invested $4.2 billion in mutual funds in 1985, up from $2.1 billion in 1984.
With interest rates relatively low—and with so many professional and ordinary investors wanting to buy—corporate treasurers have found that it is an excellent time to raise money by issuing record amounts of new bonds. According to Salomon Brothers’ Kaufman, in the first four months of 1986, companies in the United States issued a monthly average of $21 billion in new bonds, nearly double the $11 billion per month issued in 1985. Much of the money raised from the bonds, which pay a fixed
rate of interest, is being used to pay off old bank loans taken out at higher rates. Last week the Canadian prime lending rate stood at 10.5 per cent, down from 13 per cent in February. And the U.S. prime has fallen to 8.5 per cent from 10.5 a year ago.
What continues to sustain the bull market in stocks, according to some analysts, is the relatively weak performance of the North American economy. As companies keep prices low in order to win scarce sales, inflation stays down—and that, in turn, permits central banks to drop interest rates.
Still, some investment experts say they fear the consequences of the speculative fever that is driving the market ever higher. Said Jarislowsky: “In 1928 everybody thought the market was overpriced and that went on for a year.” He added: “By October, 1929, it collapsed. The higher it goes, the more it will be a total collapse.” Last week a whiff of caution was evident as the markets edged slightly downward. But among analysts, economists and investors, there was a far more robust consensus: that there is still more money to be made from the amazing bull market of the 1980s.
MARK NICHOLS with DAVID LINDORFF in New York, SHERRI AIKENHEAD in Toronto and PAULETTE ROBERGE in London
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