Newspaper article THE JOURNAL RECORD

What Really Drives Stock Market Being Questioned

Newspaper article THE JOURNAL RECORD

What Really Drives Stock Market Being Questioned

Article excerpt

NEW YORK(AP) - If there is agreement about anything on Wall Street it is that prices are ultimately driven by corporate earnings and dividends.

But, as many analysts have noted, earnings and dividends don't seem to justify the 179 percent gain in the Standard & Poor's 500-stock index since August 1982, when it was quite literally in the pits.

At 19 times last year's earnings, stock prices today are relatively high when compared to most others years, which is another way of saying that earnings aren't as high as the expectations.

Since dividend increases aren't setting records either, the explanation for the market's rise must lie elsewhere. And after only a casual survey, it is clear that there is indeed an ``elsewhere'' on the market scene.

There is, for example, the decision by General Motors to buy back as much as 20 percent of its own shares by 1990, thus lifting the price per share through the simple expedient of reducing the amount available to the public.

It is a tried and true method, used by GM's chief competitors, Ford and Chrysler, and by dozens of other large companies aiming to please shareholders, who suddenly seem to be obtaining recognition of their status as owners.

With raiders such as T. Boone Pickens waiting to pounce, it behooves managements to keep on the good side of their owners. And nothing does it like higher prices, no matter, it seems, how they get them.

Buyback activities are just one means of reducing the amount of stock on the market. Mergers and acquisitions also can result in fewer shares, since one of the companies involved might disappear into the other.

Wright Investors Service notes that since 1984 about $200 billion of stock has been removed from the U.S. market through cash purchases associated with takeovers, and that most of the money has found its way back into the market. …

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