Dow Index Climbs 6.77 to Close Above 1,400 Mark for First Time
Breaching a boundary that until recently many had considered unattainable, the Dow Jones industrial average on Wednesday gained 6.77 points to close above 1,400 for the first time.
The index of 30 of the largest corporate stocks closed at 1,403.44 after nearing or briefly surpassing 1,400 several times this week. Wednesday’s gain means that, since the Aug. 12, 1982, start of the current bull market, the most widely watched index of the stock market has climbed 626.52 points, or nearly 81%.
Volume on Wednesday was strong, with 129.5 million shares traded on the New York Stock Exchange. At one point, the Dow reached as high as 1,411.01. Other stock market indicators also showed strong gains.
Most analysts attributed the market’s recent rise to declines in interest rates and the attendant rally in the bond markets. Investors believe that the Federal Reserve Board will strive to keep interest rates low over the next year to ward off a recession.
“You had (Fed Chairman) Paul Volcker come out a week ago Monday dangling a possible interest rate cut,” said Donald I. Trott, chief strategist for the investment firm of Mabon, Nugent & Co.
Sensitive to Interest Rates
Stocks sensitive to interest rates did particularly well Wednesday. Among them was American Express Co., a component of the Dow industrial index, which gained $1.375 to close at $47.25.
Yet the Dow index’s recent performance has been treated skeptically by many on Wall Street. There, analysts, institutional investors and economists say they are mystified by its apparent strength because it appears to be unsupported by two important elements--the fundamental industrial economy and the performance of the broader market, including smaller stocks traded over the counter or on the American Stock Exchange.
Although the Dow has been closing at record levels consistently over the last two weeks, the broader indexes remain well below the records that they set in July.
The New York Stock Exchange composite index of about 1,500 Big Board stocks gained 0.24 points to close at 111.31, below its record of 113.49; the American Stock Exchange index closed at 231.20, up 0.96 but not near its record of 237.49, and the OTC composite index closed at 296.74, up 1.49 but even further below its record of 307.77. The Standard & Poor’s 500 index, an indicator watched particularly closely by institutional investors, rose 0.39 to close at 192.76, also below its record 195.65.
Broader Averages Below Highs
“The broader averages are not far from their record highs, but they’re struggling,” said William M. LeFevre, market analyst for the investment firm of Purcell, Graham & Co. LeFevre also noted that the Dow’s majestic record has remained unaccompanied by many of the so-called technical indicators--statistical trends and the like--that analysts scan for hints of the future.
“I can’t believe how bad the numbers look,” said Philip Erlanger, technical analyst for Advest, a Hartford, Conn., investment advisory firm, when the Dow tested the 1,400 level earlier this week. Among other factors, he noted that only about 100 stocks were setting new highs, compared to the 250 or so that analysts would expect in a confirmed bull rally. (On Wednesday, 115 stocks set new highs on the Big Board.)
“That’s pitiful,” he said. “The fact that we’re not even close (to the market records set in July) means that we won’t get much beyond this. I feel confident that the top is at hand.”
Institutional investors such as pension funds and insurance companies, which do most of the market’s trading, have been notably uncertain about the economic underpinning of this market. “We’re cautious because we don’t have a very clear fix on the economy,” said Lewis J. Kleinrock, president of Independence Investment Associates, which manages more than $1 billion in assets for John Hancock Insurance. “We’re (trading) with a jaundiced eye.”
Like many other major investors, Kleinrock has focused not on the small high-tech and cyclical stocks that make a genuine bull market but those larger stocks carrying a takeover premium--those that have risen in price because of real or perceived merger interest.
“We’ve made a lot of money on the Pillsburys and Kelloggs of this world,” he said. (Both companies scored big gains on the strength of takeover speculation in the food industry, although neither has been publicly bid for.)
Adding to confusion about the value of the Dow index as an indicator of overall stock market direction are the changes that have swept the investment market in recent years. Today’s Dow bears little resemblance to that of 20 years ago. Today’s stock market, in fact, bears little resemblance to that of even five years ago.
In the first place, 20 years of inflation have intervened. Without the impact of inflation, Wednesday’s 1,403.44 points are the equivalent of 432.49 points in 1967 terms (using the September consumer price index of 324.5, in which 1967 prices equal 100).
Effect of Inflation
Stripping inflation away from the Dow would dilute its impressive performance this year, in which inflation has remained steady at less than 4%. Since Jan. 1, the index has gained about 15%. The forces behind that gain lie in changes in the stock market this year--and particularly among the industrial average’s 30 corporate components.
Where Wall Street investors once looked for speculative opportunities among the low-capitalization, high-growth companies listed over the counter or on the American Stock Exchange, they have lately been looking at those companies most likely to undergo radical financial restructuring--whether by repurchasing their shares, taking on a great deal of debt, going private in a leveraged buy-out or being taken over.
Those companies are more likely to be found on the roster of blue chips and among the Dow industrials. Thus, what were once predictable, sedate issues are now hot numbers.
“There’s a phenomenal lack of traditional speculation--except in takeover stocks,” said Michael Metz, a technical analyst for Oppenheimer & Co.
The records of all the major stock indexes bear testament to the new route followed by speculative cash. For the deeper one delves into the more traditionally speculative markets, the greater the gap between today’s closing figures and their records.
The change may be seen in the once stately stocks of the Dow. For instance, one of the most volatile stocks in the country this summer was General Foods, which moved from about $70 per share to nearly $120, the price at which it was taken over by Philip Morris in a deal announced at the end of September. That appreciation alone, analysts say, accounted for about 35 points of the Dow index’s move in the same period.
Depleted by Takeovers
Another 15 points could be traced to two major companies undertaking radical financial and operational restructurings: Union Carbide, whose stock has moved to about $60 from its $34 price in January, and Westinghouse, which has risen to about $42 from $30 over the same time.
Meanwhile, the upper ranks of the stock market--that is, prominent Big Board stocks--have been depleted by the takeovers and stock repurchases of the last year or so. Professional estimates say that more than $50 billion in shares has been taken off the market by such maneuvers. These include the General Foods takeover and the similar acquisition of Nabisco Brands by R. J. Reynolds--both nearly $6-billion deals--as well as the recent purchase of Richardson-Vick’s by Procter & Gamble for $1.2 billion.
Those transactions were all cash deals, unlike the stock-for-stock mergers of the 1970s, leading to a spectacular contraction in the supply of blue-chip shares. “The shareholder in General Foods now has $120 in cash to invest somewhere,” observes Metz.
By concealing the broad market’s otherwise flat performance, the gains in takeover stocks may have kept the entire market afloat, some analysts say. Many institutional investors had been considering taking their 1985 profits out of the stock market in September or October, said Trott of Mabon, Nugent & Co.
“Because the market wasn’t going down, institutions deferred their decisions to withdraw. The fluff really defused what could have been an avalanche of selling,” Trott said, adding that he still believes a sell-off to be inevitable and now expects it to happen around March.
