`Oceans of cash’ invested in retirement funds are underpinning the US stock market’s seemingly inexorable rise, writes Susan Harrigan in New York
IN the end, it looked like the grandparent of all stock averages finally went through the 6 000-point barrier and stayed there because a number of companies reported unexpectedly strong profits earlier this week.
But those numbers from Chrysler and some other corporations were merely a quick pick- me-up for the final stretch run. The real power behind the Dow Jones industrial average’s latest surge, experts say, came from the same rich brew of demographics and economics that has lifted the Dow past three other 1 000-point milestones in the past six years, treating July’s terrifying 161-point plunge as though it were a mere speed bump.
“The July debacle was an aberration,” said Peter DaPuzzo, president of Cantor Fitzgerald Securities Corporation, an institutional stock brokerage in Manhattan. “It was like a burp after drinking too much champagne.”
Underlying the Dow’s phenomenal staying power since October 1990 is an ocean of cash seeking investment outlets. Estimated at about $4-trillion by Steven Adler, manager of the Tampa, Florida-based ASM Fund, it represents retirement savings, particularly those of baby boomers. By buying stocks, that group is now doing for the market what it did for property when boomers began buying homes in the late 1970s and early 1980s.
Much of the baby boomers’ nest egg is in mutual funds, which have poured $178-billion into the stock market in the first nine months of this year. The pace dropped off in July but tripled in August and remained strong in September.
Adler, who has said his is the only mutual fund in the United States indexed to the Dow, said that nearly half the new money invested by mutual funds in the stock market this year came from retirement plans. The plans have poured another $180-billion into individual stocks, he said, creating enormous upward pressure on stock prices, particularly because the supply of stock has been diminished by companies buying back their shares.
The 30 market-dominating stocks making up the Dow Jones industrial average have been favourites of investors since the July dip because their issues are less volatile than those of smaller and newer companies, Adler said. Moreover, despite some lacklustre second-quarter earnings that helped trigger the July drop, those companies’ profits have generally been strong, said William LeFevre, an analyst with Ehrenkrantz King Nussbaum in Manhattan.
The other key ingredient in the Dow’s rise is what some experts call the nation’s “Goldilocks” economy – warm enough to have recovered from the recession of the early 1990s but not so hot that it has created inflationary pressure on wages and prices.
Recently, one of Wall Street’s last remaining bears, Stephen Roach of Morgan Stanley & Company, changed to a more bullish position, telling investors that inflation probably won’t be a problem until next year. That reversal caused another bear, Byron Wien of Morgan Stanley, to abandon his forecast of a 1 000-point decline in the Dow and predict a possible 10% rise instead.
Wall Street fears inflation because it reasons that the Federal Reserve Board would try to fight it by raising interest rates, which would hurt stocks by squeezing corporate profits and making competing investments, such as certificates of deposit, more attractive. – Newsday