Why The Bulls Are Betting On Greener Pastures

In the public eye, the Dow Jones industrial average is the stock market, and the Dow's ups and downs are the measure of success. The Dow is trying to vault the 3000 barrier, and, for a while on Mar. 6, it looked like it would clear the hurdle only to fall back. Last July, the Dow made a couple of attempts to close above 3000 but failed. In subsequent months, the market rolled downhill, giving up 600 points.

This time is different. The Dow is likely to close above 3000 soon. The broad stock market is on a tear, and it's the 30 stocks in the Dow that are hustling to catch up. The Standard & Poor's 500-stock index, at 376.2, burst through its old record of 369 on Mar. 1. The NASDAQ Composite Index, a measure of the over-the-counter market, and the Wilshire 5000, the broadest U. S. stock market index, have also reached new highs.

'STANDING TALL.' "The rally was based on the perception that the war would be successful and brief and the economy would revive later this year," says Gordon Fines, portfolio manager of the IDS Growth Fund. So far, the first assumption has worked out swimmingly. "Investors will wait until late spring for the second perception to work out, too."

The bulls are hoping that the Fed's easy-money policy--which has helped propel the runup--will rev up the ailing economy. So far, the evidence of recovery is scant, though many figure the U. S.'s swift and decisive victory in the Persian Gulf will lead consumers to open their pocketbooks. "America is standing tall," says William M. LeFevre, market strategist at Tucker Anthony Inc. "That will start the economic recovery."

Indeed, the market is betting on better times for the U. S. economy. Technology and basic-industry stocks--tied to the economic cycle--led the first leg of the market's runup through mid-February. In March, the same stocks came to the fore again. But even those were behind financial-services stocks and consumer cyclical stocks such as autos, housing, and retailing, which are also dependent on an economic upturn.

With the market having come so far so fast, some investors are wary. By valuation measures, stocks are not cheap. The price-earnings ratio for the S&P 500 is 17.5, and the dividend yield, 3.2%. Strong gains in earnings or big boosts in dividends would improve the market's underpinnings, but most would agree those are still many months away.

At the same time, long-term interest rates, which dipped below 8% in mid-February, have backed up some 0.25 percentage points. That further stretches the stocks' high valuation. But the backup in rates could also signal the bond market that the recovery is under way. If so, corporate profits will look better sooner, which will further bolster stocks.

And there's more help for stocks. Recently, the dollar has climbed more than 6% vs. the yen and the mark. The firmer dollar, says Robert S. Robbins, market strategist for Robinson-Humphrey Co., will bring foreigners back to the U. S. "Dollar assets now look a lot more attractive to them," he says.

The next test for stocks could come in April. Stocks have been vulnerable in Aprils past, as first-quarter-profit reports disappoint investors. But maybe not this time. "Nobody even cares about the first half of 1991," says IDS's Fines. Indeed, if the economy is showing evidence of a revival, the market will shrug off the weak profits and continue to climb.