Wall Street's surprise 1995 rally, having already made fools of untold numbers of bearish investors, may be ready for a new phase: a mania that sends stock prices soaring to extraordinary levels.
"I think we're at the edge of a speculative blow-off stage," says Standard & Poor's Corp.'s veteran market analyst Arnold Kaufman, speaking with equal parts wonder and caution.
If talk of a bigger market surge sounds outlandish--with the Dow Jones industrial average already up 14% this year--consider what happened in 1987.
Most investors remember 1987 as the year of the October market crash. But before the crash could occur, stocks had to be taken to extreme heights.
Between Jan. 1 and Aug. 25 of that year, the Dow rocketed a stunning 44%, from 1,895 to 2,722. It wasn't a straight-up climb--the market sold off modestly in the spring--but the gain by the August peak certainly makes this year's Dow rise look bush-league.
On Thursday, the market took a breather, with the Dow easing 13.49 points to 4,359.66 after soaring 44.27 points to record levels on Wednesday.
The bears seized on Thursday's roller-coaster action, which saw the Dow up nearly 40 points early in the day before selling off, as a sign that the market is over-tired and primed for a pullback.
Wall Street faces a key test today, when the government reports on April employment. Both the bond market and the stock market are counting on data that reinforces the popular scenario of a slower, but not too slow, economy.
Yet if stocks are indeed in the early stage of a wild run-up, even a big gain or drop in joblessness that rocks the market would be a minor setback--the proverbial "buying opportunity" before share prices zoom again.
Why think the market may be entering a mania? The most fervent bulls see a convergence of highly favorable trends all pointing to a new stampede into stocks, or at least into \o7 enough \f7 stocks that key market indexes like the Dow and the Standard & Poor's 500 will continue to rise.
Chief among those trends, of course, is the economy's apparent slowdown from 1994's torrid growth. The bullish thinking is that moderate growth will keep inflation restrained and allow interest rates to continue easing, allowing the economic expansion to stretch into 1996 and maybe beyond.
Give the economy more running room, the market's champions say, and you extend the prospects of continued corporate earnings gains and thus the bull market.
In early-1987, as today, investors saw the potential for controlled interest rates and inflation, plus healthy corporate profits. Interestingly, that bull market, like this one, was already in its fifth year. Yet instead of growing more worried about a peak in stocks, investors found new reasons to justify pushing share prices higher.
Some analysts see another reason why this year's market surge may be the start of a mania of sorts. As during the early 1960s, recent years have seen robust corporate earnings growth. But unlike the early-'60s, blue-chip stocks' price gains between 1992 and 1994 failed to keep up with earnings gains.
The S&P 500 index's total return (price gain plus dividends), was 7.6% in 1992, 10.1% in 1993 and 1.3% last year. In contrast, operating earnings of the S&P companies grew 11%, 15.6% and 15.1% in those years, respectively.
It may well be that the spectacular first-quarter earnings reported by many major companies this year have been a form of wake-up call for investors--an invitation to get on board as stocks play some long overdue catch-up.
But if there's going to be a mania at this stage of the bull market, would all stocks necessarily have to be part of it? One school of thought suggests more of a repeat of the Wall Street experience of the early 1970s.
That was the era of the Nifty Fifty stocks, a group of high-quality growth companies whose earnings outlook was considered so stellar that the stocks were known as "one decision" issues: You bought and held.
Between 1970 and early 1973, those Nifty Fifty stocks such as Walt Disney, McDonald's, Avon Products and Sony ran up to prices that were 50 to 100 times their underlying annual earnings per share.
It was a mania for a narrow group of stocks, but their incredible gains were enough to keep the broad market indexes moving ahead for more than two years.
This year, some market pros see a return to a new Nifty Fifty, stocks like Coca-Cola, Intel and Johnson & Johnson. They are bigger companies than most of the 1972 breed, and therefore their earnings growth rates are more modest. But the same force that drew investors to the premier growth stocks of 1972--a feeling that their prices didn't reflect their earnings potential--is drawing buyers to this year's growth-stock leaders.
Maybe the new Nifty Fifty won't ever sell for 50 times earnings, say their fans. But buyers have been driving those stocks higher for four months, and most of them don't yet even sell for 25 times earnings. To the bulls, the growth stock revival is far from over.