Milestone Dow Offers Revealing Peek at the Future

When the stock market passed a milestone last week, it offered a revealing and reassuring indicator of the U.S. and world economies.

Yes, the Dow Jones industrial average closing above 4,000 was only a numerical curiosity, a quick response to Federal Reserve Board hints about lower interest rates. The market pushed higher still Friday, the Dow closing at 4,011.74.

But in a larger sense, the market's optimism testified to the rising global standing of U.S. industry. The specific companies that pushed the Dow over the top are powerful in international markets because they've done what it takes to be that way.

And Dow 4,000 doesn't even include the more exciting story of U.S. technological industry--the growing computer, chip and software companies that count as world leaders but aren't included among the 30 stocks of the Dow average.

What happened in the stock market also puts in useful perspective the alarms and confusion about international markets, from the implosion of Mexico to the outlook for Germany, Japan and the beleaguered U.S. dollar.

In short, it hints at the future that, like the past, is neither all roses nor all thorns.

In the four years since it passed 3,000, the strongest performing stock on the Dow--a weighted average that is the market's best known indicator--was Goodyear Tire & Rubber Co., which rose from $11.31 a share to $36.25, a 220% jump.

What got into Goodyear in 1991, as it was recovering from losses, was a new chief executive named Stanley Gault, who was then 65 and at the end of a distinguished career at General Electric.

Gault restructured Goodyear, which had limped under a debt load since a 1986 takeover attempt. He sold subsidiaries in roofing and plastic film, paid off debt and pushed the tire business. Goodyear employment fell from 107,671 to 89,800, including employees who left with the subsidiaries. But the company came back to earn $1 billion last year on $12 billion in sales, roughly 42% of them outside the United States.

Another big gainer on the Dow, Caterpillar Inc., has 50,445 employees today, 9,000 fewer than in 1991. But it has gone from $135 million in losses to $955 million in profit on $3 billion more in sales, half from global markets.

The point for the future is that companies in the rest of the world, notably Germany and Japan, are going to have to restructure as U.S. firms have done. And that means business for U.S. providers of technology--the Hewlett-Packards, Intels and Microsofts that supply computer workstations and the vital chips and software that guide them.

American investment in such equipment--and the efficiencies that have resulted--are a big factor behind the stock market rise that culminated last week in the Dow's milestone.

The Dow average itself includes almost none of the leading computer companies; IBM is the only formally high-tech company on the index, and its stock has declined in the last four years.

Meanwhile, IBM's star status has passed to Hewlett-Packard, the Palo Alto-based maker of personal computers, workstations, electronic test equipment and printers. Since 1991 it has grown by 72% to $25 billion in sales. Profits and the stock price have doubled.

H-P's secret, a quality it shares with many U.S. companies these days, is enterprise and flexibility and an absence of bureaucracy. The great story of the laser printer, related originally in Forbes, tells it all.


In 1981, an H-P manager named Richard Hackborn came upon a small motor made by Canon of Japan that could power a desktop printer. Canon wasn't interested in the product, but Hackborn was. He asked H-P's then-Chairman John Young to let him organize a new business based on a desktop printer. Young gave the OK, and Hackborn went off to a separate plant to build what has become H-P's world leading laserjet printer business.

The moral: If H-P had been IBM or Xerox in the old days--or many other companies--Hackborn never would have received permission to make a product from someone else's part. There might be no laserjet printer.

The kind of flexibility H-P demonstrated is one of the recaptured glories of U.S. businesses, many of which went through a severe buffeting by foreign competition in the 1980s. The ordeal tempered the companies, made them worldly. Almost all the firms whose rising stock prices pushed the Dow over 4,000 get one third or more of their business internationally. And even those that don't are growing fast, such as Walt Disney Co., which--trouble at EuroDisney notwithstanding--now gets 23% of its $10 billion revenues from world markets for films and videos and the Disney Channel. Those totals will only grow as the world market for entertainment develops.

Now it is foreign companies' turn to be buffeted by U.S. competition. Europe has begun to restructure its big companies; its economies, led by Germany, are growing. But in terms of flexibility and use of technology, European companies are where U.S. firms were in the late '80s. So "this year, Europe will be making large investments in machinery, equipment and technology," reports the investment firm Morgan Stanley. Japan, more slowly, also has begun to restructure its companies.

That means markets for U.S. technology suppliers and other exporters. The business will be welcome as a replacement for Mexico, where an economy in recession will buy fewer U.S. exports. The Federal Reserve Board estimates that Mexico's troubles will reduce U.S. economic growth by more than $20 billion, or 0.3%, this year.


So the U.S. economy will be healthy enough in '95, but not growing too rapidly. And it will be a bastion of industrial strength compared to other areas in a changing, uncertain world. That's one reason U.S. and foreign mutual fund money is investing predominantly once again in U.S. stocks and bonds, a pattern that is likely to lift the dollar's value as it has already pushed the Dow over 4,000.

As an indicator, the stock market is not always rational or correct--but last week it rightly reflected real strength in U.S. business.

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