Dow Breaks 2,000 Level, Sets 4th Record in a Row
Continuing a historic stock market rally, the Dow Jones industrial average breached a psychological milestone Thursday by closing above 2,000 points for the first time in its 102-year history.
The closing level of the widely followed index of 30 blue-chip industrial stocks was 2,002.25, a gain of 8.30 points and its fourth consecutive record close. Since Jan. 1, the Dow index has gained more than 105 points.
Although securities professionals played down the significance of the 2,000-point Dow in any but psychological terms, few minimized its subjective importance.
“It’s a milestone because round numbers intrigue everyone,” said Newton Zinder, chief market analyst for the E.F. Hutton & Co. financial house. William LeFevre, market strategist for the Hartford-based investment firm of Advest, added: “This will bring a lot of little investors into the market, because the publicity associated with it focuses a lot of attention on the Dow.”
Precisely because milestone numbers attract so much attention, their crossings have often created an atmosphere of some instability. Many professionals expect the market to pull back today and to undergo a greater reversal later this quarter that could pare 15% off the Dow index, dropping it back to about 1,700. Sentiment on Wall Street is that the market would then turn upward again, at least until the Dow industrial index reaches 2,500.
“My feeling is you’ll see that crossing 2,000 is not a big event that changes anything dramatically,” Zinder said. “In the next several months we’ll be crossing 2,000 several times--in both directions.”
Such “corrections” are common features of market rallies as some investors convert their paper profits to cash and others take the opportunity to move into the market. The corrections may become even more violent this year, some believe, because changes in the federal tax law have removed any incentive for investors to hold stocks for at least six months, the period that, until the end of 1986, stocks had to be owned to be eligible for favorable capital-gain tax treatment.
“Reaching 2,000 creates a lot of publicity, leading people to think the market’s too high,” said Robert J. Farrell, chief market analyst for the Merrill Lynch & Co. investment firm. That will create some pressure to sell, he argued, until the market remains so securely above 2,000 “that it makes people comfortable.”
He added: “Of course, we haven’t had much experience in crossing thousand-point marks.”
1,000 Was a Dud
What experience the market has had should give the bulls something to think about. The Dow’s first close over 1,000 was greeted with great fanfare on Nov. 14, 1972, when investors and Wall Street professionals read it as a sign that explosive economic growth lay in store for 1973. Market analysts were nearly unanimous in forecasting that the Dow could rise an additional 150 to 300 points within two years (the proportional equivalent of 300 to 600 points today).
But the subsequent performance of the stock market and the economy testifies to the futility of economists’ predictions. For it took nearly 10 years, or until October, 1982, for the Dow industrial average to reach even 1,100.
The intervening decade was one of historically high inflation and interest rates, which sap the stock market of its vigor by creating appreciation in real assets rather than financial assets: property, precious metals and collectibles rather than stocks and bonds.
Expectations of economic growth proved to be considerably too optimistic, as the annual growth in the gross national product slid from 7.5% in 1972 to 5.6% the next year and minus 0.6% in 1974. By December, 1974, the bottom of that cycle, the Dow had fallen to 577.60.
GE Only Survivor
The Dow index of today differs considerably from the stock average created in 1896 by Charles H. Dow, a founder of Dow Jones & Co., publisher of the Wall Street Journal. After fiddling with the prices of the leading industrial stocks of the day, Dow satisfied himself with an average of the weighted prices of 12 stocks. Only one of those issues remains in today’s Dow industrial index of 30 stocks: General Electric.
Over time, the index has become such a familiar benchmark of stock market performance that its ebbs and flows have taken on somewhat more importance in the popular mind than in the professional world. Most professional investors measure their own performance against the broader Standard & Poor’s index of 500 industrial stocks.
Still, the Dow’s behavior since the start of the current bull market shows how the rally has gathered steam in the last couple of years, as inflation abated and interest rates fell. The bull market began with the index at about 777 in August, 1982. It crossed 1,300 in May, 1985, and 1,500 that December. Since then, a period of scarcely 13 months, the index has picked up 500 points.
With deflation taking the kick out of non-financial investments, “now the stock market is the only place where you can find a reasonable current yield and the prospects of growth,” Advest’s LeFevre said.
Other Indicators Up
LeFevre and other analysts note that the latest surge in the Dow index has been accompanied by a gratifying strength throughout the stock market. Record levels were also reached Thursday by two other important market indices: the New York Stock Exchange composite index, which rose 1.12 points to 147.55, and the S&P; 500, which rose 1.95 to 257.28. It was the second consecutive record close for both indicators.
The American Stock Exchange index and the NASDAQ over-the-counter index also showed sharp gains Thursday but remained below their record highs. This suggests that investors are just beginning to turn their attention to the relatively more speculative stocks that make up those indices.
On the New York Stock Exchange, 1,164 issues gained in price and 497 fell. New highs were reached by 146 stocks and new lows by four. Both ratios are considered signs of strength.
The bull market that brought the Dow industrials so far in such a short time rests on factors other than the strength of the U.S. economy. That is lucky for equity investors, for economic growth has been meager since late 1984, with the gross national product showing annual growth of only 2.9% in 1985 and 2.3% last year.
Stock Supply Dwindling
One important bullish trend has been the dwindling supply of stock for investors to buy, a product of the unprecedented wave of corporate mergers and stock repurchases of the last two years. During that period, corporate buyers have reduced the supply of stock by nearly 12.5%, says Merrill Lynch’s Farrell, or by $60 billion in the last year alone.
“Lately, the primary buyer’s been the corporate buyer,” Farrell said.
Also important during the period has been an inflow of foreign capital; while corporations were retiring stock, foreign buyers were spending $22 billion on U.S. stocks, more than the $20 billion that American investors pumped into equity mutual funds.
Wall Street professionals expect the pace of foreign investment in U.S. stocks to rise this year--they are counting on it, in fact. This notion is based on the relative performances of stock markets in the United States and abroad over the last few years: Several overseas markets have outstripped the performance of the Dow this year. While the Dow industrials rose by 22.6% in the year from Dec. 31, 1985, the Japan stock market rose by nearly 60%, Hong Kong by about 50% and France by more than 50%.
Analysts expect funds to flow out of those markets because of the perception that they may have peaked. They particularly expect an influx of Japanese investment because Japan’s market has risen so fast. The Nikkei stock average, the closest thing to a Dow industrial index in Japan, crossed the 1,000-point barrier at about the same time as the Dow. Now it is close to 19,000.
