A Bull With the Wobblies

By TOM PETRUNO

Jan. 1, 1998 12 AM PT

TIMES STAFF WRITER

‘What a Year!” read the frosting atop the cake that traders devoured at the New York Stock Exchange on Wednesday.

Some wags suggested that a good stiff drink would have been more appropriate.

Stocks closed out the final session of 1997 with a mixed performance, as the Dow Jones industrials slipped 7.72 points to 7,908.25. But the Dow’s gain for the year still came to a stunning 1,459.98 points, or 22.6%--marking the third straight year that the blue-chip index climbed 20% or more. (It rose 33.5% in ‘95, 26% in ’96.)

In the 100-year history of the Dow there has never been a three-year period like 1995 through 1997, a fact that may be lost on many small investors who have come to view rich stock market returns as routine.

Yet the bull market’s advance was considerably more labored in 1997 than in the prior two years. Indeed, what has more than a few Wall Street pros deeply concerned about the 1998 outlook is the amount of stress and pain that accompanied stocks’ full-year gains in ‘97:

* The year saw two significant “corrections,” as the Dow plunged nearly 10% between March 11 and April 11 in the wake of a Federal Reserve Board interest rate hike, then suffered a 13% pullback between Aug. 6 and Oct. 27 as Asia’s economic disaster unfolded.

* For the Standard & Poor’s 500 index, the year’s 31% gain was achieved despite four interim declines of 5% or more (each over a period of several weeks)--three of them since August. The S&P; was hit with just one such decline in 1996, and none in 1995.

* The market’s rising volatility was demonstrated in spades on Oct. 27, when the Dow plummeted 555 points--enough to suspend trading for the rest of the day, as an NYSE market-closure rule adopted after the 1987 market crash was triggered for the first time.

* The heaviest trading volume ever on the NYSE occurred on Oct. 28, as 1.2 billion shares changed hands amid the market’s recovery from the previous day’s plunge.

The bottom line: While investors who were in the market for the entire year reaped handsome returns, since early August stocks overall have faltered.

The Dow peaked at 8,259.31 on Aug. 6, so at Wednesday’s close it was off 4.3% from its record. The Nasdaq composite index of mostly smaller stocks, up 21.6% for the year, is down a full 10% from its record high set Oct. 9.

Is that loss of momentum enough to suggest that the 7-year-old bull market is on its last legs?

Ricky Harrington, veteran technical markets analyst at brokerage Interstate/Johnson Lane in Charlotte, N.C., believes there now is a 40% chance in 1998 of a bear market (usually defined as a drop of 20% or more in major indexes), about an equal chance of a trading range market that would see the Dow bounce between 6,500 and 8,500, and just a 10% chance of another great gain.

Those 40% odds of a bear market might not seem overly worrisome, but Harrington puts it this way: “If you knew your home had even a one in 10 chance of being hit by a tornado, you’d move.” Even so, he concedes, “I’ve been wrong for a long time about this market.”

He has plenty of company. A year ago, almost no serious pundit on Wall Street believed that stocks could rise 20% or more in 1997. Most now say the same about 1998.

Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York, says that purely from a valuation point of view, U.S. stocks look dangerously high to most veteran market watchers: Based on earnings per share for the four quarters ended Sept. 30, the average blue-chip stock in the S&P; 500 index is priced at 24 times earnings.

Only once before have stocks been this pricey, Kaufman says, and that was for a brief time coming out of the 1990 recession.

Now, with Asia’s mess threatening to slow global growth--and U.S. multinational companies’ profits--in 1998, the valuation issue may become even more onerous.

Yet many Wall Street bulls argue that there still are too many positive fundamentals underpinning U.S., European and Latin American stocks to suggest those markets must go the way of debt-burdened, overbuilt Asia.

A few of the U.S. positives: the capital gains tax cut in 1997, which makes stocks more appealing than the alternatives; Uncle Sam’s surprise budget surplus, which supports the dollar’s strength (and thus should attract foreigners to our markets); low inflation; and aging baby boomers’ ongoing shoveling of billions of dollars into retirement accounts.

Perhaps most important, many bulls believe there is great potential for the recent slide in long-term bond yields--which brought the 30-year Treasury bond yield down to a near-four-year-low of 5.92% as of Wednesday, versus 6.64% a year ago--to accelerate in ‘98, should Asia’s turmoil slow world growth. Lower rates, and falling commodity prices, could be very supportive of stocks.

The bullish outlook doesn’t allow for the catastrophe scenarios, of course--especially the Asia-triggered deflation/depression scenario. But then, the bears have been waiting on catastrophe for a long time now--and they’ve left a lot of money on the table.

Coming Sunday: Our 1997-98 Investment Review and Outlook will offer insight, tips and information to help you evaluate your portfolio and make money in 1998. For more insight on your investment choices, plan to attend The Times’ Investment Strategies Conference Feb. 7-8 at the Convention Center. For information, call (800) 350-3211.

* CALIFORNIA IPOs: A look at the best performers among the state’s new stock offerings in 1997. D2

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Lotta Pain, Lotta Gain

The Dow Jones industrial average rose 22.6% in 1997, the third straight year of 20%-plus gains--a streak unprecedented in the Dow’s 100-year history. But it was hardly an easy climb. The market experienced two sharp “corrections,” and volatility overall was much higher on a day-to-day basis--raising concerns about what will follow in 1998. The Dow in 1997:

Dec. 31, 1996: Dow ends year at 6,448.27; 30-year T-bond at 6.64%

March 25: Federal Reserve Board raises key short-term rate from 5.25% to 5.5%

April 11: First correction ends as Dow bottoms at 6,391.69, down 9.8% from March 11 peak.

May 20: Fed refrains from raising rates again.

Aug. 6: Dow hits record high of 8,259.31.

Aug. 8: Coca-Cola warns of weak earnings.

Early October: Asia currency crisis explodes.

Oct. 27: Asia woes spur mini-crash. Dow drops 555 points; trading suspended.

Wednesday: Dow ends year at 7,908.25; T-bond at 5.92%

As Asia Stumbled...

1997 changes in key Asian stock market indexes, in native currencies:

-55%: Thailand