TIME: Almanac 1993/TIME Almanac 1993.iso/time/011392/0113201.000

Text File | 1992-08-28 | 2KB | 38 lines

                                                                                BUSINESS, Page 38

COVER STORIES

What Do the Bulls Know?


    The stock market put on a spectacular show of defiance in
1991. Wall Street's bulls ignored the crushing weight of debt
on the economy and the signs of a protracted recession. Every
major stock-market index pushed into record-high territory. The
Dow Jones average leaped 535 points to an all-time peak of
3168.83, a gain of more than 20% -- and for good measure, rose
nearly 33 points during the first two days of 1992. The S&P 500
gained even more than the Dow during 1991, rising 26%, and
NASDAQ, the most popular measure for small stocks, surged a
record 57%.

    The man most responsible for fueling the rally was Alan
Greenspan. The Federal Reserve chairman engineered a drastic
drop in the discount rate, which is what the Fed charges banks
for borrowing money, from 7% at the beginning of the year to
3.5% at the end. Besides giving the economy a nudge, the drop
in rates triggered a wave of so-called asset shifting. Dismayed
by low yields on CDs and Treasury securities, savers bet their
money on the stock market. A record $31 billion flowed into
stock mutual funds during the first 11 months of the year.

    But how reliable is a rising market as a leading indicator
of economic recovery? In the past, the bulls have been a good
bet. The last time the Fed pushed down interest rates to end a
recession was in the summer of 1982, which quickly sparked a
Wall Street rally. Four months later, the economic slump was
over. But bulls know when to retreat too. If investors see no
recovery by summer, watch out for at least a temporary comeback
of the bears.