FINANCIAL MARKETS : Bully for the Dow : Even Pessimists Say the Climb Isn’t Finished
The Dow Jones industrial average’s surge above 5,000 for the first time Tuesday marked another milestone in a surprising year for the pundits who had predicted 1995 would be lackluster for stocks. And many of these analysts now see continued rises ahead, although they hedge, pointing to signs that the rally could stall.
Indeed, the Dow achieved its historic close on an otherwise mixed day for stocks, with advancing issues leading decliners only modestly--1,281 to 1,027--on the New York Stock Exchange. Two major indexes--the technology-weighted Nasdaq composite and the small-company Russell 2000--fell on Tuesday.
“What you have is a bifurcated market, a two-tier market,” said Alan Ackerman, market analyst at Fahnestock & Co. Investors are “sticking with the safer securities, where they can benefit from slower economic growth.”
The Dow index of 30 blue-chip stocks jumped 40.46 points to end at 5,023.55. The Standard & Poor’s 500 index, which represents some 75% of the value of all U.S. stocks, also hit a new record, 600.26, surpassing last week’s record of 600.07.
But computer stocks helped send the Nasdaq composite index down 4.48 points to 1024.99 on Tuesday, for its second straight decline. Investors have been rotating out of some of the high-flying technology stocks and into blue chips.
Since Oct. 1, the Dow has gained 5.5% and the S&P;, 3.2%, but the Nasdaq composite has fallen 0.3%.
Despite concern about the technology sector, many Wall Street professionals see the Dow’s breaking 5,000 as evidence that stock prices are headed still higher.
“It confirms our long-term love affair with stocks,” Morgan Stanley & Co. stock strategist Thomas McManus said. “Stocks seem to be the asset of choice.”
Byron Wien, Morgan Stanley’s chief U.S. stock strategist, is recommending that his firm’s clients with a stock orientation put 98% of their money in the market and keep only 2% in cash.
Even analysts who have been bearish this year are rethinking their pessimism. “I’ve been bearish and wrong,” said David Shulman, Salomon Bros.’ chief stock market strategist. “Dow 5,000 is a validation of the bull market. I am rethinking everything as we head into 1996.”
With a few exceptions, the experts on Wall Street had expected a lackluster stock market this year, though perhaps with some life toward the end. So common was this view that Wien wrote in January that one of the top 10 surprises for 1995 would be if the Dow cracked 4,500.
What did the gurus miss?
“The magical combination of falling interest rates and strong corporate earnings,” McManus said. “Having both pulling in the same direction has been wonderful.”
Nonetheless, today “there are two different mind-sets,” said Eleanor Hoagland, chief portfolio strategist with AMT Capital Advisers in New York. “One looks at a fairly solid economy and fairly decent earnings and says, ‘There’s no reason this can’t continue.’ The other side looks at history and says, ‘You don’t go this far without a pause.’ ”
And greed has often been a recipe for disaster. Market trends suggest stock pickers are becoming less sanguine, said Geoffrey Brod, a money manager at Aeltus Investment Management Inc. Some of the best recent performers have been steady-earning consumer products, cosmetics and beverage stocks--a signal that expectations for a slowdown in earnings are multiplying. “Some people are anticipating a slowdown in the economy, maybe even going into a recession,” Brod said.
But the pessimists are quiet and the optimists bold. “Before we get into the next century, I can see the average going up to 8,000 or 10,000,” said Robert Brody, president of the American Growth Fund in Denver. Brody says prices haven’t risen as far as they have in some past run-ups. In 1954, for example, a bull market carried the Dow industrials up 44%.
During Tuesday’s session, the Dow index circled the 5,000 mark for most of the day before soaring on a burst of buying in the last 15 minutes. On Monday, it had edged past the mark but failed to close above it. By comparison, the index took more than a year to close above 4,000 after it first hit that mark during trading in February, 1994.
Losses in high-tech issues came on profit-taking in the Internet sector, which has risen dramatically in recent months. Among the big losers, UUNET tumbled 20 1/4 to 72, and Spyglass lost 14 to 90 3/4. Netscape lost 8 1/2 to 107 3/4, Secure Computing fell 8 to 47 1/2 and NETCOM On-Line lost 7 3/4 to 66 5/8.
Dell Computer also fell back. After the stock market closed Monday, Dell posted better-than-expected third-quarter earnings, but concern about future growth drove Dell shares down 1 1/8 to 40 1/4.
Among stock market highlights:
* Boston Beer, which produces the Samuel Adams and other beer brands, soared 8 points to 28 on its first day of trading. Other initial public offerings also drew interest: Meadowbrook Insurance, up 3 5/8 to 24 5/8, and Network Appliance, up 7 points to 20 1/2.
* Food stocks, whose earnings are regarded as consistent whether there’s an economic boom or bust, climbed. Coca-Cola jumped 1 5/8 to 76 7/8, PepsiCo gained 3/8 to 54 7/8, Campbell Soup surged 1 1/8 to 54 3/8 and General Mills advanced 1 1/2 to 55.
* Caterpillar led the Dow’s drive, closing up 3 3/4 to end at 59 3/8. Shares in the maker of heavy equipment were upgraded by Smith Barney, and the 17-month United Auto Workers strike against the company may be near an end.
* Pilots of Federal Express, who have been negotiating a contract since May, 1994, are discussing work slowdowns during the holiday season. That news helped push the stock down 1 3/4 to 77 1/2.
* Helene Curtis Industries was down 1 5/8 at 27 7/8 after the maker of personal care products said late Monday that it expects to report a fiscal third-quarter loss and predicted that earnings for the year ending Feb. 29 will fall short of analyst expectations.
Treasury bond yields rose Tuesday as an auction of 10-year notes generated only moderate demand. The yield of the Treasury’s main 30-year bond rose to 6.26%. On Monday, the bond’s yield closed at 6.24%. In a government auction of $13.5 billion worth of 10-year notes, non-competitive bids, reflecting interest from individual investors, were the strongest they’ve been in five years, bond traders said, but institutional demand was weaker than expected.
* HISTORIC MARK
Dow closes above 5,000 after 40-point gain. A1
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The Road TO 5,000
It was only 23 years ago--on Nov. 14, 1972--that the Dow Jones industrial average first closed above 1,000, a level with which the blue-chip index had flirted since the mid-1960s. And not until 1982 would the Dow drive convincingly through 1,000, as the greatest bull market in U.S. history was born. A look at the Dow’s milestones since 1982, and what helped fuel the gains between each:
1,000 to 2,000
* Time period: 1982 to Jan. 8, 1987
* Percentage increase: 100%
* Driving forces: Falling inflation and interest rates, tax cuts under President Ronald Reagan, powerful economic expansion driven by “yuppie” consumerism, corporate takeovers and restructurings encouraged in part by Michael Milken’s “junk” bond financing.
2,000 to 3,000
* Time period: 1987 to April 17, 1991
* Percentage increase: 50%
* Driving forces: Fall of the Berlin Wall and collapse of communism and the Soviet empire, allied victory over Iraq in the Persian Gulf War, economic recovery after recession of 1990.
3,000 to 4,000
* Time period: 1991 to Feb. 23, 1995
* Percentage increase: 33%
* Driving forces: Falling interest rates (until 1994), continued low inflation under Federal Reserve Board Chairman Alan Greenspan, unprecedented stock mutual fund purchases by individual investors.
4,000 to 5,000
* Time period: February to Nov. 21, 1995
* Percentage increase: 25%
* Driving forces: Booming corporate profits, falling interest rates, Republicans’ promise of a balanced federal budget, technology-stock mania.
A Confident 5,000
The Dow milestone underscores increased investor confidence this year, buoyed by a combination of factors:
* Moderate but steady economic growth and continued high profits reported by corporations.
* Low interest rates, which encourage consumers to borrow and spend more and cut the cost of borrowing for companies, encouraging them to expand.
* Low inflation, which gives both businesses and consumers confidence that the economy will not overheat and distort their planning decisions.
* Increased wealth for investors and higher profits multiply the effects. A strong economy can translate into greater job security for workers, although recent layoffs and restructurings have had the opposite effect for some.
Sources: TradeLine, Associated Press, Times reports
