At first glance, the soaring bull market seems like it's due for a fall. Various measures of stock values are dangerously near levels that signaled market tops in the past.
But relying solely on these measures may be deceiving, many experts say. Several factors that have propelled stocks to record highs--low inflation, low interest rates, corporate restructurings, fast money growth and high foreign buying--persist and could easily keep the good times rolling for several months or longer, they say.
"I can't recall a previous period when all these things were going on at one time," George K. Dorian, technical analyst at Wedbush Securities in Los Angeles, said of the combination of bullish conditions.
If the bull market continues, it would prolong a market rise that already has astounded most analysts for its ability to defy most precedents. The Dow Jones index of 30 industrial stocks, at a record 2,280.23, has nearly tripled since the bull market began in August, 1982--a run-up unparalled in speed since the roaring 1920s.
The list of market leaders--dominated earlier in the bull market by the blue-chip stocks of the Dow industrial average--now includes a broader cross-section of issues. Broader market indexes, such as Standard & Poor's 500 stock composite index, the American Stock Exchange market value index and the NASDAQ composite index of over-the-counter stocks, have all joined the Dow industrial index in setting record highs in recent weeks.
Such major advances have pushed three widely watched stock indicators--price-earnings ratios, dividend yields and the ratio of stock prices to book value--close to levels that historically have preceded bear markets. Accordingly, some market analysts worry that a correction of 10% or more--which could shave more than 200 points off the Dow index--could interrupt or end the current bull market.
Price-earnings ratios, which measure the price of a stock divided by its earnings per share, are now averaging about 18, more than double the level four years ago and near the 20-plus range that has preceded major bull market tops in 1962, 1966, 1969 and 1972, said Norman G. Fosback, editor of Market Logic, a Fort Lauderdale, Fla., newsletter.
But price-earnings ratios based on last year's fourth quarter results may be inflated somewhat. That is because many companies took writeoffs in that quarter, due to the repeal of the investment tax credit or other changes under tax reform, said David Blitzer, chief economist for Standard & Poor's. With those factored in, the ratio for the S&P 500 might be 16.5 or 17 instead of 18, he said.
The price-earnings ratio also may be overstated because corporate earnings are expected to surge this year, thanks to restructuring, shedding of unprofitable assets, layoffs and other cost-cutting moves. Blitzer, for example, expects per-share earnings of companies in the S&P 500 to rise 23% this year (more optimistic than the consensus of other economists), which would cut the price-earnings ratio of the index to a more comfortable 14.7.
Current low dividend yields also are misleading, some analysts say. Dividend yields--annual dividends as a percentage of stock prices--now are at 2.96% for the stocks in the S&P 500, Fosback said. That's the first time they have fallen below 3% since July, 1973, he said. Yields below 3% also preceded market tops in the last three decades, he said.
But instead of boosting dividends, many companies have bought back stock, which really is just another form of dividend in that it raises share prices, said Elaine M. Garzarelli, chief quantitative analyst at Shearson Lehman Bros. in New York. International Business Machines and General Motors Corp. are among the most noteworthy of firms recently announcing plans to buy back stock. Other companies, such as ITT Corp., are studying it.
Also, low dividend yields may not last long. Reduced individual tax rates under tax reform, which make dividends relatively more attractive, are spurring more companies to boost dividends, reversing a trend of recent months, said Arnold Kaufman, editor of Standard & Poor's Outlook newsletter.
Companies now also have the earnings power to be more generous with their dividends, Tracy G. Herrick, an economist for Jefferies & Co., a Los Angeles brokerage, contended. "True" corporate earnings, which include depreciation allowances in excess of the actual wearing out of plant and equipment, have doubled in the past 2 1/2 years, while dividend payments have risen slowly, Herrick said.
"Look for 1987 to be the year of the dividend," Herrick said. "Earnings are likely to be stronger, and companies are likely to be more receptive to shareholders' new interest in receiving dividend checks because of the new tax laws."