Red-Hot Dow Soars Past 5,600

Despite fears that the slowing economy could fall into a recession, this year’s stunning stock market rally continues to roar ahead at a pace that is surprising even the most bullish Wall Street experts.

On Monday, the Dow Jones industrial average posted its sixth consecutive gain, soaring 58.53 points to close above 5,600 for the first time. It was the 13th record high in the last 16 trading sessions. The Dow index of 30 industrials surpassed 5,400 only a week ago and shattered 5,500 last Thursday.

But with prices having risen so far, so fast in 1996, opinion is building among analysts that there are now signs that the market is poised for a pullback--though they don’t see an end any time soon to the bull market.

“I’m starting to feel that it’s time to take a little bit off the table,” said Jack Baker, director of stock trading at Furman Selz Inc. in New York, referring to the selling of stocks to collect profits.

“It’s time for a little more caution,” he said.

Still, the market’s rally is remarkable by any measure. After chalking up a sizzling 33.5% gain in 1995, the Dow average already has shot up another 9.4%, or 483 points, in just the first six weeks of this year, closing Monday at 5,600.15.

As paradoxical as it may seem, much of the market’s steady fuel supply comes from the slowing U.S. economy. The Federal Reserve Board, concerned that the slowdown could turn into a recession, has been pushing short-term interest rates lower over the last two months in an effort to help the economy expand more briskly.

That’s sweet music to Wall Street’s ears, because lower lending costs--especially at a time when inflation is relatively low as well--reduce businesses’ borrowing costs, prompt consumers to spend more and make interest-bearing investments such as bonds and money-market mutual funds less attractive relative to stocks.

Low interest rates are one reason why corporate profits--a key driver of stock prices--are rising even though the economy is sluggish. Also, giant companies such as General Motors and International Business Machines are reaping the benefits of dramatic cost-cutting efforts.

There’s another big factor extending the rally: A historic river of cash pouring into mutual funds that invest in U.S. stocks.

In January, investors plowed a record $24.5 billion more into stock funds than they withdrew, according to the Investment Company Institute, a fund trade group. Fund managers must immediately put that cash to work, which they do mostly by purchasing more stocks and thus bidding prices still higher.

And investors are sending checks to stock funds not only because they want to hop aboard the market’s breathtaking rally, but also because most other types of investments--bonds, precious metals, real estate, collectibles--haven’t been able to offer them the same returns as stocks.

“Everyone’s aware of the underlying positives [in the economy]: low inflation, falling interest rates, decent confidence” among consumers, said Joe Battipaglia, market strategist at Gruntal & Co. in New York. “Investors have concluded that they need to be in financial assets. Stocks are returning more than bonds, so money is being applied to stocks almost willy-nilly.”

Broader measures of the market, such as the Standard & Poor’s 500 composite index, also rose to new highs Monday, though not as vigorously as the Dow Jones industrials.

To be sure, as the stock market keeps going higher, its daily point gains become less impressive on a percentage basis. Whereas the Dow Jones industrial average rose 12.5% when it climbed from 4,000 to 4,500, the gain amounted to 10% when it increased from 5,000 to 5,500.

Also, when compared to some other measures of the economy--such as corporate profits--the stock market is still not wildly overpriced by historical standards.

But even as the market has rallied to the point where veteran analysts are running out of superlatives to describe it, some Wall Streeters said they’re seeing signs that the market is poised to drop back, at least briefly.

What signs?

For one, the broad market is struggling to keep up with the widely sought-after blue chips in the Dow Jones industrial average, said Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago. In recent sessions, broad indexes of the market have not chalked up the percentage gains posted by the Dow industrials, he noted.

In addition, the number of stocks that are rising on an average day is by no means overwhelming the number that fall in price. On Monday, for instance, gainers led losers 4 to 3 on the New York Stock Exchange, but there were more losers than gainers on the American Stock Exchange and on the Nasdaq Market.

That’s an important indicator because it shows “there is enough anxiety among investors” about the market’s near-term outlook “that they’re looking at fewer stocks [to buy] rather than the whole market,” Chalasani said.

All of which doesn’t mean the bull market in stocks is about to end, analysts said. Rather, they look for any “correction” in prices to give the market time to catch its breath before trying to push higher once again.