Concern About Excesses On Wall St. Overblown Heady 1995 Obscures Reverses Sustained In 1994

Everyone’s concerned that the stock market rally is verging on excess.

It’s true that the Standard & Poor’s 500 Index, a broad measure of the market, is up 37 percent in the past 12 months. It’s also true, however, that in the past 24 months, the S&P index is up 33 percent.

People forget 1994 was a lousy year for stocks and 33 percent isn’t an outsized gain for a two-year period. It’s about 15 percent a year compounded.

Taking a still longer view, the S&P 500 is up 89 percent in the past 60 months. That’s about 13 percent a year compounded. That’s more than the return on stocks over the decades, according to all the studies, but is it enough to make investors switch all their stocks into cash?

The real froth is in the computer-related stocks, you say? That’s true too. Nasdaq’s Combined Composite Index, the haven for high technology shares, has jumped 43 percent in 12 months.

But the Nasdaq stocks did poorly in 1994 too. The index is up 38 percent in the past 24 months. What’s more, many high tech stocks have slumped lately, taking their “corrections” as the market jargon would have it.

Shares of Intel Corp., the dominant maker of microprocessors for personal computers, have declined 22 percent since touching their 52-week high on July 17.

Shares of Hewlett-Packard Co., which makes computers and printers, have dropped 16 percent since Oct. 30. Motorola Inc., which makes microprocessors and cellular phone equipment, has fallen 27 percent in about two and a half months.

For months, some analysts have expressed concern that low dividend yields indicate stock prices are too high. The current yield on the 500 stocks in the S&P index is 2.21 percent. Traditionally, analysts figured stocks were in trouble when the yield was less than 3 percent.

It’s not that companies lack cash to pay higher dividends, it’s that they are using it for other things, notably to buy back shares.

International Business Machines Corp., for instance, this year has announced plans to buy back $7.5 billion worth of its stock. IBM could increase its annual dividend from $1 a share to $4.84, where it was during the computer company’s headier days.

That would cost $2.2 billion a year - and the company would still have something left for buybacks. But the company chooses to keep the dividend low.

This isn’t to say investors have no cause for worry. Internet stocks are still off in infinity. In recent days, investors have started to pay still more for stocks in relation to their earnings.

And you have to wonder if the old Dow Jones Industrial Average isn’t getting ahead of itself. Once it hit the 5000 level last month, it seemed to rise inexorably.

And some of the solid-citizen Dow stocks look as if they should be in Nasdaq. In the last 12 months, for instance, Coca-Cola Co. shares have produced a total return — market gain plus dividends paid — of 57 percent. And the stock still sells at more than 33 times Coke’s estimated 1995 profits.

So keep worrying. It may help keep the market in line.