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During the 20th century, there have been but two secular (as opposed to cyclical) bull markets in common stocks: 1921-29 and 1949-65. Another golden age, which could carry the Dow Jones Industrial Average well past the 4000 mark by the early 1990's, began in 1982, according to the author of this plausible if not wholly persuasive exercise. Leeb, a publisher of investment advisory services, is basically a market timer who believes that sustained advances in equity prices result from favorable alignments of economic forces. He cites four musts for an upward move of any duration: real economic growth greater than inflation (as measured by the GNP deflator); bond yields at least twice the inflation rate; short-term interest rates lower than long-term interest rates; and a money supply (M2) on the rise. The author provides a detailed review of how his formulaic system would have worked fron 1921 to date. Unsurprisingly, his ex post facto record is superb. As a practical matter, though, successful application appears to require judgment calls at major turning points. To cite a recent example, all four conditions were not met until the first quarter of 1983, meaning strict adherents of Leeb's approach would have missed six or more months of the dramatic recovery that began in August, 1982. On the downside, investors who acted on the basis of venturesome projections would have incurred significant risks and, possibly, losses on a number of occasions. Leeb, however, remains confident the current rally is for real on several counts--e.g., an appreciably lower rate of inflation, demographic changes that are slowing the work force's growth, an entrepreneurial renaissance, deregulation, and the dawn of an information era. In closing, he asserts that secular bull markets go through three distinct stages. In the first and third, fundamentals (notably, earnings gains) are the crucial determinants of stock quotes; during the lengthy middle phase, by contrast, psychology On the form of expansive price/earnings ratios) dominates. For those who want a piece of the prospective action in equities, Leeb supplies listings of investment-grade issues that satisfy varying criteria. An inviting market scenario that, for all its ifs and maybes, presents a credibly documented challenge to conventional wisdom.

Pub Date: Feb. 19th, 1985
Publisher: Putnam