Blue Chips Lead Market as Dow Hits Record High
U.S. blue-chip stocks surged to record levels on Tuesday despite a growing list of political and economic worries, leaving Wall Street once again debating how high is too high for the 7-year-old bull market.
The Dow Jones industrial average rocketed 115.09 points, or 1.4%, to a record 8,295.61, finally topping the previous record close of 8,259.31 set Aug. 6--and further dimming the memory of October’s mini-crash.
Tuesday’s rally had no particular trigger, analysts said, but rather reflected the increasing urgency with which investors have been pouring money into the market in recent weeks--seemingly ignoring the likelihood of a U.S.-Iraq military conflict, President Clinton’s intern imbroglio and long-term concerns about Asia’s economy.
“Americans can’t seem to worry about things for a protracted period,” said Eric T. Miller, strategist at brokerage Donaldson, Lufkin & Jenrette Securities in San Francisco. “Problems don’t necessarily get solved, but people get tired of worrying about them.”
Others said the market’s gains this year, with the Dow now up nearly 5% since Jan. 1 after a 22.6% rise in 1997, in part represent a “relief rally” that Asia’s crisis at least appears to have stabilized, and that fourth-quarter earnings reports from many major U.S. companies were a bit better than expected.
What’s more, Wall Street has continued to benefit from heavy corporate-takeover activity, stock-buyback announcements and restructuring moves by such high-profile companies as General Motors, Goodyear Tire & Rubber, AT&T; and SmithKline Beecham.
In addition, January usually brings a torrent of fresh cash into many pension funds, challenging fund managers to find investments for that money.
Given all of those positives, “what could have been Dow 6,000 now is looking more like it’s going to be Dow 9,000,” said Dennis Jarrett, head of Jarrett Investment Research in Westport, Conn.
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The Dow jumped 3.6% last week alone amid heavy trading, and the broadest blue-chip stock index, the Standard & Poor’s 500, last Thursday hit its first record high since early December, topping the 1,000 mark for the first time.
The S&P; index has risen more than 200% since the current bull market began in 1990.
As has been the case for most of the past four years, the market has been led this year by shares of major U.S. multinational firms such as Microsoft Corp., General Electric and Walt Disney Co.
Indexes such as the Russell 2,000, which tracks smaller stocks, remain below their 1997 peaks despite the Dow’s gains.
The latest surge of money into big-name stocks reflects many fund managers’ unwillingness to fight what has been a prolonged trend, Jarrett said.
Because the blue-chip S&P; index has beaten most fund managers’ performance since 1994, “if you’re paid to outperform [the index] you feel that you’ve got to be buying the GEs and other major names” now, Jarrett said.
The appeal of those stocks, even as they become expensive, historically, relative to their underlying earnings, is in part a function of the ease with which investors can buy and sell them.
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In the six months it has taken the Dow to hit another record, the market has experienced some of its wildest swings in a decade, including the Dow’s biggest one-day point decline ever, a 554-point, 7.2% plunge on Oct. 27 as Asia’s economic crisis came to a head.
The market’s rising volatility has encouraged more institutional investors to stay in well-known, highly liquid stocks that they can easily exit, analysts say.
That has left many investors who own smaller stocks lagging far behind. Indeed, while 76% of New York Stock Exchange issues rose in calendar 1997, only 52% of stocks listed on the Nasdaq market rose, while 46% fell. Nasdaq is the home of most smaller stocks.
Still, money is flowing back into the stock market, and into blue chip issues in particular, for more than technical reasons, most analysts say. Many investors simply believe that it makes more sense to stay in stocks than to be out of them, given a still-healthy U.S. economy and subdued interest rates and inflation.
“The individual investor has had it drummed into him over the last 10 years to focus on the long term,” said Tony Dwyer, strategist at Ladenburg Thalmann & Co.
Unlike in 1987-88, when small investors retreated from stocks in the wake of the October 1987 market crash, U.S. stock mutual funds have continued to attract many billions of dollars since last October’s mini-crash.
Falling interest rates have helped. Long-term bond yields have edged up in recent weeks, but remain near the 20-year lows set in mid-January. Lower rates make stocks more attractive versus fixed-income investments.
The trend in rates has been influenced by expectations that the U.S. economy will slow this year as Asia’s economic turmoil reduces demand for American exports.
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Christopher Low, senior economist for HSBC Markets Inc. in New York, said the U.S. economy is strong now, with consumer confidence close to a 30-year high.
But Low, echoing recent comments by Federal Reserve Chairman Alan Greenspan, said that the fallout from Asia’s woes will start taking a toll later this year.
The National Assn. of Purchasing Managers’ index of export orders is at an all-time low, a signal that U.S. manufacturers’ export sales will drop off in the second half of the year, Low said.
In fact, Low’s firm is projecting that U.S. economic growth will turn negative in the fourth quarter, hurt by slumping exports.
While a weakened economy could be bad for stock prices if it is accompanied by falling corporate profits, for now many investors remain confident that companies will find ways to continue driving earnings higher.
“The key to the market is earnings, and two-thirds of S&P; 500 corporations are still meeting or beating expectations” with their fourth-quarter reports, said Alan F. Skrainka, chief market analyst at brokerage Edward D. Jones & Co. in St. Louis.
And although the bigger test for earnings growth lies ahead, ongoing takeover mania and restructuring moves among major companies are aimed in large part at keeping profits on the rise.
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Goodyear, for example, this week announced plans to boost productivity sharply through job cuts and through the use of new technology in tire making.
Meanwhile, major European stock markets have been hitting highs this year on optimism about companies’ earnings prospects there. And even battered Asian markets have bounced higher, for the most part, after hitting multiyear lows in mid-January.
For now, neither Asia, nor the worsening U.S.-Iraq confrontation, nor the misconduct allegations against President Clinton seems to be enough to deter investors from pushing more money into stocks, analysts say.
Even so, David Jones, economist at Aubrey G. Lanston Co. in New York, said that “all of [those negatives] suggest we’re on a lot weaker ground than we were last August” at the point of the Dow’s previous record high--before any of the current major risks were introduced to the market.
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Volatile Run
After six months of wild swings, the Dow on Tuesday fin-ally topped its previous record close of 8,259.31 set last Aug. 6. Weekly closes and latest:
Aug. 6: 8,259.31
Tuesday: 8,295.61
Source: Bloomberg News
