In Long Term, Dow’s Swings Don’t Matter

As the stock market soars relentlessly toward the historic 3,000 level on the Dow Jones industrials, many investors increasingly fear that there can only be two possible outcomes: Either this is a major breakout to perhaps Dow 5,000 by the mid-1990s or the market is being set up for a fast collapse to a Dow of 1,500 or less.

In other words, many people seem to believe that to buy stocks now is an all-or-nothing bet.

But a growing school of market pros believes that the next few years won’t bring a Dow of 5,000 or 1,500. Instead, these analysts see the market continually rising and falling in a broad but reasonable range, as many of the currently vexing problems of the world economy are worked out.

According to this school of thought, the Dow average in three years may in fact be no higher than it is now. But many individual stocks will certainly be much higher, while others are sure to be far lower. The concept of winners and losers in the same period is pretty basic, of course, but it’s often tough to focus on that when investors become obsessed with the Dow as a monolithic symbol of the market.

Robert A. LeFleur, research director for Chicago-based Northern Trust Co.’s investment division, is one expert who is pounding the table for the bull market case. Although he believes that the Dow could reach 3,150 or better in this powerful rally, from 2,934.65 on Friday, LeFleur says flatly that “this is not a new, secular bull market.”

Rather, he predicts “a series of swings” in the broad market during the next five to seven years, periodically taking the Dow perhaps to the low-2,000s, then back up to the low-3,000s. The driving force behind the down moves will be recurring disasters in the financial system, as the debt mountain and other excesses of the 1980s are slowly purged, LeFleur says.

It’s the method of resolution of those excesses that separates bulls like LeFleur from the bears who see an imminent market plunge. To the bears, the banking system is nearing collapse under the weight of bad loans from the 1980s. When the system begins to unravel, so will the economy, say the bears. So they see a deepening recession that will shock Wall Street.

The investors who have bid the Dow up to 2,934 now from 2,365 in October--a 24% surge--will soon fly out of the market just as quickly, precipitating a bear market of monumental proportions, the pessimists say.

But LeFleur sees the workout of the debt load, the real estate crisis and other market worries as long-term processes, not single events. He recalls that the Third World debt crisis of the early 1980s was also expected to sink the banking system. Instead, that crisis has been dealt with in bits and pieces during the past 10 years, without destroying the banks or the global economy.

As an aside, LeFleur says it’s worth noting that Wall Street is petrified over the decline in real estate values largely because the movers and shakers in finance are the very people whose high-priced homes are falling in value, in California and on the East Coast.

“But much of the rest of the country is functioning very well, even though high-priced real estate isn’t,” he says. The message there: Many well-run U.S. companies will prosper during the next few years--and so, too, should their stocks--no matter how much money is lost in real estate.

A. C. Moore, research chief at Argus Research in Santa Barbara, is another veteran analyst who sees a trading range market for years to come. “Bull markets and bear markets tend to imply a certain beginning, middle and ending,” Moore says. Rather than such defined cycles, Moore sees the early 1990s characterized by “investable trends” that come and go as the economy readjusts from the easy-money 1980s.

If the Dow ultimately falls to 2,000 from 3,000, that would be a 33% decline. If it then rebounds to 3,000, that would be a 50% rise. That kind of up-and-down market may frighten investors who had grown used to the straight-up bull market of the 1980s. But, in fact, such a trading range would present many opportunities to investors large and small.

Moreover, long trading range markets were the norm in the 1960s and 1970s, as economic growth ebbed and flowed. “A lot of us lived the early years of our investment careers in exactly that environment,” says James Rothenberg, executive vice president of Los Angeles-based money manager Capital Guardian Trust.

The Dow average first bumped up against the 1,000 mark early in 1966. It fell to 750 later that year, rebounded almost to 1,000 by early 1969, then fell to 650 in 1970. For the rest of the 1970s, the Dow repeatedly bounced between about 750 and 1,000--a 33% rise from bottom to top, and a 25% drop from top to bottom.

All the while, many companies were building their businesses, and many stocks (particularly smaller stocks) performed far better than the Dow. So a trading range market, says Rothenberg, “is not necessarily bad for people to work in, or to grow businesses in.”

Right now, the bulls clearly are in control of the trading range. To the bears, the rising number of bullish market advisers is a “contrarian” signal, suggesting that the end of this rally may be near. But Moore and others warn that when the market moves with the momentum it has seen in recent weeks, bullish sentiment can reach much higher levels before the rally ends.

To the bears who say the stock market will soon plummet and stay at frighteningly low levels for years, Northern Trust’s LeFleur poses the question: What else will investors do with their money? Returns in real estate will be awful, and the bear scenario of a weak economy suggests that interest rates (and thus bond and bank CD returns) can only head lower.

Unless you assume that all successful companies will vanish from the planet, LeFleur says, it seems absurd to believe that investors will stay away from stocks for very long at a time. “What are your alternatives for positive returns?” he asks.

Rather than worry about timing every Dow top and bottom with 100% of your money, analysts like Argus’ Moore say the smart investor will always keep a substantial portion of his assets in solid stocks, buying more when prices drop and trimming when prices rocket and better stock ideas surface.

That simple strategy has never failed to produce excellent returns for investors over the long run. And it sure beats wasting time nervously pondering whether the Dow tomorrow will be at 5,000 or 1,500. “Everybody wants those answers,” Moore says, “but they aren’t there.”

THE BULLS ARE IN CONTROLChartcraft Inc. investors service in New Rochelle, N.Y., surveys 135 non-brokerage investment advisers weekly to gauge market sentiment. Chart shows how the percentage of advisers who are bullish has fluctuated. (The balance are either bearish or see a mere correction coming.) Source: Chartcraft Inc.