NEWS ANALYSIS : Dow Milestone Shows Optimism About Economy : Investing: Despite business’ problems, the Dow Jones industrial average is up 50% from January, 1987, when it first crossed the 2,000 mark.

Like the birth of a baby or the end of communism, the Dow Jones industrial average’s first close over 3,000 ought to be a moment to savor. It’s a milestone, any way you slice it.

Wall Street, of course, will downplay this, as it usually does. “There’s not a lot ofeuphoria here, as you might think there’d be,” admits Larry Greenwald, trader at brokerage Sanford C. Bernstein & Co. in New York.

“It’s been so long in coming, and the Dow did it (3,000) so reluctantly,” laments Arnold Kaufman, editor of Standard & Poor’s Corp.’s Outlook market newsletter.

Listen to too much of that, and you may well wonder how the Dow ever got past 300, let alone 3,000.

The fact is, more people probably are frightened by 3,000 than are cheered by it. The Dow has soared 639 points since last October, or 27%. Maybe the market is topping out. Maybe stocks have gotten ahead of themselves.

But investors shouldn’t lose sight of something very basic here: Despite all of the things that have gone wrong over the past few years--despite the Gulf War, the recession, the debt bomb, the banking crisis--the stock market overall is up 50% from January, 1987, when the Dow first crossed the 2,000 mark.

And to take it back a bit farther, the market is up 200% from 1982 and 500% from 1956 (when the Dow first crossed 500). Who says long-term investors don’t make money in stocks?

Indeed, the underlying message of 3,000 is one of continuing optimism about America, as corny as that might sound. It’s about the simple expectation that the economy will grow in the long run and that companies will profit from that growth, ultimately rewarding their shareowners. That’s the way it’s always been. Investors are merely affirming that they don’t see the cycle ending.

The 3,000 message is about fear and greed too. But you can’t have markets without those elements.

Certainly, a major force behind this rally is big investors’ fear of missing the boat. The higher the market goes, the greater the pressure on bearish money managers to stop worrying and jump aboard.

Albert Nicholas, a 60-year-old Milwaukee money manager who has compiled an excellent stock-picking track record since 1967, worries that “many stocks now are overpriced,” courtesy of the market’s Johnny-come-lately investors. “We’re selling more than we’re buying now,” he admits.

But he also acknowledges that for many investors “the alternatives to stocks just aren’t there.” Bond and money market yields have fallen sharply, real estate returns look dismal and gold and silver continue to lose value. If not stocks, “where else do you go?” Nicholas asks rhetorically.

Yet if big investors are reaching that conclusion only reluctantly, many individuals seem to be happily embracing the concept of stocks. Small investors’ purchases of stock mutual funds have remained amazingly strong the past two years, despite short-term turmoil in the market and the economy.

If that trend continues, the ramifications could be dramatic. There are 76 million baby boomers, the mega-generation born between 1946 and 1964. If they are, in fact, shifting from high consumption to high savings, the demand for stocks could be astounding in the 1990s--as the demand for housing, cars and VCRs was in the 1980s.

There’s one other message in the Dow’s journey to 3,000, however: It wasn’t a straight line to get here, and it won’t be a straight line to 5,000 or 10,000. If you’re going to invest, you’ll have to live with market swings that may get even crazier in the years to come, as information travels ever faster.

“Markets go through periods of undervaluation and overvaluation,” Nicholas reminds. Whether the Dow is overvalued at 3,000 is anyone’s guess. If the economy doesn’t recover this spring, and corporate profits don’t rebound, 3,000 could turn into 2,000 fast. “The key question is what happens to earnings one or two quarters down the road,” warns Greenwald.

Still, even if the market plunges from here, you can bet that at the next signs of economic recovery money will flow back quickly.

Money may not, however, flow back into all stocks. That’s another sobering market principle that is worth a bit of reflection at this time of a Dow milestone.

In fact, were it not for Dow Jones & Co.’s substitution of some not-so-industrial stocks in the Dow average in the 1980s, 3,000 might still be a long way off. The Dow’s best-performing stocks from the 2,000 level to the present were Philip Morris (up 267%), Coca-Cola (up 189%) and Merck (up 165%). All were added after 1978.

If, on the other hand, you had purchased Goodyear Tire as a long-term investment when the Dow breached 2,000, you would have lost half your money by now.

What Dow 3,000 tells you is that nobody picks all winners all the time in the market. But a diversified portfolio, as a long-term bet on the American and world economies, still beats most alternatives.

MAIN STORY: A1

OVER THE TOP

The Dow Jones industrial average flirted with the 3,000 mark last July and again in early March before finally pushing through on Thursday. But the day was not without uncertainty. The index fluctuated above and below the line throughout trading before making the final thrust in the last hour. BIG DAYS ON THE DOW Beginnings: In 1884, the Customers Afternoon Letter publishes the average of the closing prices of 11 stocks. Twelve years later an industrials list is introduced; it grows to 30 issues by 1928. Historic Crashes: The infamous Oct. 28, 1929, saw nearly 13% of the Dow’s value disappear in a 38-point slide. It closes that day at 260.64. But the biggest point loss in history comes Oct. 19, 1987-Black Monday-when the Dow lost a whopping 508 points to close at 1,738.74. Millennial Marks: Closes over 1,000 on Nov. 14, 1972; over 2,000 on Jan. 8, 1987. Flirting with 3,000: For several days in July, 1990, the Dow crosses 3,000 in intraday tading but always finishes just below the mark. The rally ends with the outbreak of hostilities in Kuwait but is rekindled in January with the start of the Persian Gulf War.

HOW THE DOW IS FIGURED

The Dow Jones industrial average, the most widely quoted stock gauge, is a price-weighted average of 30 major stocks. Dow Jones & Co. adds up the prices of the 30 stocks and calculates the average by using a divisor that has been adjusted for stock splits through the years. That divisor now is 0.505.

At Wednesday’s close, the sum of the 30 stocks was $1,517.25. Divide by 0.505 and you get 3,004.46.

MARKET REACTIONS

‘The fear element is gone. We’ve done it; we know we can do it again.’

GENE JAY SEAGLE, Director of technical research at Gruntal & Co. in New York.

‘We have (flirted with 3,000) two times before. The third time is the charm. . . . I think we are going much higher. I estimate that we could get a good 20% additional move before we have any pullback. At that point, 3,000 could become a floor.’

SOL TIETELBAUM, Los Angeles investor

‘When we broke 1,000 in 1966, the floor put up a pretty good roar. This is a low-key excitement. It’s a relief. Since we’ve hit this psychological barrier several times and then backed off, it became more and more of a barrier. Now that we’ve hit it, it’s not a barrier anymore. I hope I’m here when we talk about 4,000.’

LEE GREENE, Vice president of Lehman Bros. in Los Angeles

‘In August, everyone was jubilant. They were talking about new highs. But then, the market fell apart. If traders seem subdued, it might be because they are afraid to celebrate too soon.’

ROBERT M. GREBER, Executive vice president of the Pacific Stock Exchange

‘Three thousand means nothing. Nobody cares about the Dow.’

BRANDFORD G. WEEKES III, Senior vice president of equity trading at Dondaldson, Lufkin & Jenrette Corp. in New York

‘This shows that the market has an underlying vitality that can’t be denied.’

MICHAEL METZ

DOW JONES INDUSTRIALS

The Dow Jones industrial average was first compiled on May 26, 1896, and included only 12 stocks. The index was expanded to its current 30 companies on Oct. 1, 1928. Following are the 30 industrials, in the order they were added to the index.

Company Date Added to Index Allied-Signal (formerly Allied Chemical) Oct. 1, 1928 Bethlehem Steel Oct. 1, 1928 Exxon (formerly Standard Oil of New Jersey) Oct. 1, 1928 General Electric Oct. 1, 1928 General Motors Oct. 1, 1928 Navistar (formerly International Harvester) Oct. 1, 1928 Primerica (formerly American Can) Oct. 1, 1928 Procter & Gamble Oct. 1, 1928 Sears, Roebuck Oct. 1, 1928 Texaco (originally Texas Corp.) Oct. 1, 1928 USX (formerly U.S. Steel) Oct. 1, 1928 Union Carbide Oct. 1, 1928 United Technologies (formerly Wright Aeronautical) Oct. 1, 1928 Westinghouse Electric Oct. 1, 1928 Woolworth Oct. 1, 1928 Chevron (formerly Standard Oil of California) July 18, 1930 Eastman Kodak July 18, 1930 Goodyear July 18, 1930 DuPont Nov. 20, 1935 AT&T; March 14, 1939 International Paper July 3, 1956 Aluminum Co. of America June 1, 1959 Minnesota Mining & Manufacturing Aug. 9, 1976 IBM* June 28, 1979 Merck June 28, 1979 American Express Aug. 27, 1982 McDonald’s Oct. 28, 1985 Philip Morris Oct. 28, 1985 Boeing March 12, 1987 Coca-Cola March 12, 1987

* IBM was on the original October, 1928, roster but was replaced by AT&T; in 1939.

IBM was added back in 1979, along with Merck, when Chrysler and Esmark were dropped.

FROM 2,000 TO 3,000: HOW THE DOW DID IT

Which Dow stocks have led the charge from 2,000 to 3,000? Here’s where the 30 stocks stood when the index crossed the 2,000 mark for the first time, on Jan. 8, 1987; where the stocks stood at the close on Black Monday, Oct. 19, 1987, and where they closed Wednesday.

1/8/87 10/19/87 Wed. Stock close close close Philip Morris 19 1/4 22 70 5/8, -1 Coca-Cola 19 3/8 15 1/4 56, + 1/2 Merck 43 1/4 53 3/8 114 3/4, +1 3/4 Procter & Gamble 40 30 3/4 89 1/2, + 1/8 Boeing 23 1/8 17 1/8 47, + 1/2 Bethlehem Steel 7 1/4 11 3/8 13 3/4, + 1/2 Alcoa 36 3/8 42 1/2 68, +2 5/8 Texaco 37 3/8 32 1/2 68 7/8, - 7/8 General Electric 45 41 7/8 75 1/4, + 3/8 Exxon 36 1/2 33 1/2 60 1/8, unch. McDonald’s 21 5/8 18 1/4 35 3/8, unch. International Paper 39 7/8 33 7/8 64 7/8, +1 1/2 Chevron 48 5/8 41 1/4 79 3/8, + 1/4 USX Corp. 22 21 1/2 33 5/8, - 1/4 Woolworth 21 1/2 18 1/8 32 3/4, - 1/4 AT&T; 25 1/2 23 5/8 37 7/8, + 5/8 3M Co. 60 1/8 52 89 1/4, + 1/4 Primerica 22 1/4 22 1/2 32 3/8, - 3/4 Du Pont 30 26 7/8 40 1/8, + 3/8 General Motors 34 5/8 30 38 7/8, +1 American Express 31 1/2 22 1/2 29 7/8, + 1/2 United Technologies 48 3/4 41 45 5/8, - 7/8 Westinghouse 31 1/8 20 1/8 29 1/8, +1 1/8 Eastman Kodak 47 3/8 41 7/8 42 7/8, + 3/4 IBM 122 7/8 104 109 7/8, + 5/8 Sears 43 3/8 31 37 3/8, + 3/4 Union Carbide 25 25 18 3/8, + 5/8 Navistar 5 3/8 4 7/8 3 7/8, unch. Allied-Signal 44 1/8 27 5/8 30, + 1/2 Goodyear 44 1/4 42 1/2 22 5/8, - 1/8 Dow average 2,002.25 1,738.74 3,004.46

Pct. change, Stock 2,000 to 3,000 Philip Morris +267% Coca-Cola +189% Merck +165% Procter & Gamble +124% Boeing +103% Bethlehem Steel +90% Alcoa +87% Texaco +82% General Electric +67% Exxon +65% McDonald’s +64% International Paper +63% Chevron +63% USX Corp. +53% Woolworth +52% AT&T; +49% 3M Co. +48% Primerica +46% Du Pont +34% General Motors +12% American Express -5% United Technologies -6% Westinghouse -6% Eastman Kodak -9% IBM -11% Sears -14% Union Carbide -27% Navistar -28% Allied-Signal -32% Goodyear -49% Dow average +50%

All prices adjusted for splits, where applicable.