Current Surge in Stocks Displays Breadth, Depth

THE bulls are rampaging through Wall Street - and barring unforeseen economic developments, they may do so for much of 1992, stock market experts say.

The market rally of the past few weeks is "larger than life," says Larry Wachtel, a vice president of Prudential Securities Inc. The market is "admittedly strong" regarding blue chip, interest-rate sensitive companies that would be expected to benefit from the latest reduction in interest rates by the Federal Reserve Board. Such stocks include housing-related companies, financial institutions, consumer lending firms, and brokerage houses.

But what has become increasingly evident is the breadth of the current rally, says Mr. Wachtel, with scores of companies not necessarily linked to interest rates also posting gains. A modest rebound in housing is helping to propel the market: Home sales for November were considered good - up 5.4 percent over the prior month, and the largest gain in six months.

On Dec. 20 the Federal Reserve Bank reduced the discount rate by one percentage point, thus putting downward pressure on interest rates. Since then the market has soared, climbing more than 250 points. On Dec. 31, the final trading day of 1991, the Dow Jones industrial average closed at 3,168.83 - a gain of more than 535 points since the prior New Year's Eve.

That meant a gain of more than 20 percent for the Dow during 1991. Small stocks soared even more; some small-stock indexes climbed 50 percent or better during 1991.

Market optimists believe that 1992 could outperform 1991. The market is on an upward course, according to Gene Jay Seagle, chief market technician for Gruntal & Co., an investment house. Moreover, the 1992 presidential election should spur the market, since, historically, stock markets tend to post gains during election years, according to analysts such as Mr. Wachtel. The reason? Washington does everything that it can to rev up the economy during election years.

According to market strategist James Stack, only once during the past 50 years has the market, as measured by the Standard & Poor's 500, lost ground in a presidential election year between Jan. 1 and the November election. That year was 1960, when John Kennedy defeated Richard Nixon.

What's currently driving the market?

A number of factors, say analysts, including lower interest rates, large cash holdings by institutional investors, the likelihood of a federal tax-reduction package during the next few months, the expectation of higher corporate profits in 1992, and - despite continuing consumer concerns - a growing perception that economic recovery may be on the way.

The December 1991 stock rally - what market technicians call a "Santa Claus" rally - was also sparked by year-end tax-related transactions, as well as the availability of new "Christmas money" that some investors quickly placed into stocks. "Short-sellers," who buy stocks for speculative purposes, have also been kicking cash into the market.

Competing investments are considered marginal, with bank certificates of deposit, money- market accounts, and passbook savings accounts paying around 4 or 5 percent. Stocks, thus, "are the only game in town now," in providing solid returns, says Wachtel.

In terms of corporate profits, 1991 was disappointing. But that could change. Earnings per share for the S&P 500, for example, were off about 10 percent for 1991. But Standard & Poor's expects that per share earnings could rise by about 20 percent in 1992. David Blitzer, chief economist for Standard & Poor's, notes that many companies took large accounting write-offs in 1991, thus depressing earnings.

Experts, however, are quick to add that just coasting through 1992 will not be easy for the market, especially when the stampede starts to get as dizzying, as is now occurring.

"The [stock market] bandwagon is getting just a little bit crowded," says Mr. Stack. He points to continuing economic difficulties in some regions, particularly in the Northeast and along the Eastern Seaboard. He also notes that the Fed obviously considers the economy far weaker than it has been saying, since the Fed's latest rate cut was so large - a full percentage point. Only one other time during the past 80 years, says Stack, was the rate cut that much all at once. That occurred just after the stock

market crash in late 1929.

Moreover, the market is currently highly valued, which adds elements of risk and uncertainty. The price/earnings ratio for the S&P 500, for example, is currently running at 23. It would normally be far less.

Stack says he believes a market correction from 3 percent to 5 percent cannot be ruled out during the months ahead. But once that has occurred, he sees the market once again taking off as it moves through the election-year cycle.

Types of stocks expected to do well in 1992 involve not only interest-rate-sensitive stocks, but companies engaged in basic manufacturing, (except for auto firms), exports, and health care products. Stack says 1992 "will probably shape up as not too bad" a year for the market. But the stock market, experts stress, is more often than not full of roller-coaster surprises. The best advice, they say is to stay alert and hang on tight.