Stock Rally Pushes Dow, Nasdaq to New Highs

Mocking year 2000 computer bug worries and widespread concern about excessive speculation, the stock market roared ahead Thursday, lifting the Dow Jones index to its first high since August.

The rally also drove the main index of the technology-dominated Nasdaq Stock Market to its 58th record high this year, pushing the 1999 gain to an unprecedented 81%.

Wall Street veterans said Thursday’s session may prove to be an exclamation point for the market’s spectacular year, with trading expected to wind down next week ahead of the century changeover. Markets are closed today in observance of the Christmas holiday.

But many analysts also conceded that assumptions about a market slowdown next week could prove as wrong as predictions several months ago that stocks worldwide would sell off in December because of investors’ fears over the Y2K computer bug.

Indeed, instead of cashing out of the riskiest stocks, investors have poured massive sums this month into already highly valued tech and telecommunications shares worldwide.

While long-standing investing discipline on Wall Street would argue that most of those stocks are dangerously overpriced, the concept of “momentum” investing--simply jumping aboard the fastest-moving shares, in the hope that they will continue to soar--has become a favorite strategy for large and small investors alike.

“In many cases people have just adopted the attitude that if you can’t beat them, join them,” said Richard McCabe, market analyst at Merrill Lynch & Co. in New York.

On Thursday, the Dow surged 202.16 points, or 1.8%, to 11,405.76, topping the previous peak of 11,326.04 set Aug. 25. The Nasdaq index rose 0.8% to 3,969.44.

Aggressive buying of stocks already up sharply hasn’t been limited to the U.S. market. Global stock markets hitting new highs Thursday included those in Germany, Singapore, Brazil and Canada.

Today in Hong Kong the main Hang Seng index leaped 3.3% to a record, erasing all of the decline endured in the Asian economic crisis that began in mid-1997.

Just as the continued strength in global stocks has taken many forecasters by surprise, so has the relative lack of interest in “safe-haven” securities, such as Treasury bonds, ahead of Y2K.

Interest rates on U.S. Treasury securities had been expected to drop this month amid a Y2K-related “flight to quality” by investors. But just the opposite has occurred: Yields have jumped sharply amid upward pressure on all interest rates in the robust U.S. economy and as some investors apparently have cashed in bonds to buy stocks.

Moreover, investors’ use of borrowed money to buy stocks zoomed in November, according to the New York Stock Exchange. Its member brokerages said investors took out a net $24 billion more in loans to buy stocks last month, raising the total amount of so-called margin debt to a record $206.3 billion.

Heavy use of credit to buy stocks is a classic sign of extensive, and dangerous, market speculation, some analysts contend.

The U.S. market’s performance has reminded some pros of the Japanese market’s hot streak in the late-1980s. That bull market ended almost exactly 10 years ago, when the Nikkei stock index peaked at 38,915.87 on the final trading day of 1989--after rising 80% just from the end of 1987.

What followed, of course, was a disastrous bear market that dragged the Nikkei down more than 60%. Even today, at 18,675.65, the index remains far below its 1989 peak.

Many analysts, however, contend that there are more differences than similarities between Japan in the late ‘80s and the U.S. today.

Nonetheless, many Wall Street pros have been at a loss for words to describe what has happened with U.S. stocks in the tech and telecom sectors, which have been by far the driving forces of the 1999 rally--even as many stocks in other industries have either gone nowhere or fallen in price for the year.

Shares of San Diego-based wireless technology company Qualcomm, for example, have rocketed 1,700% since Jan. 1, from $25.91 to $466.50 as of Thursday. The price reached a peak of $522.13 earlier this week.

At least since 1984, no stock of significant size has ever come close to scoring that kind of percentage gain in one year, according to market research firm Ned Davis Research.

By contrast, the average NYSE stock is up just 8% in 1999.

For the many Americans whose wealth is tied up in stock mutual funds, the typical fund return this year now exceeds 20%, far better than the average NYSE stock. That’s because many mutual funds have loaded up on the most popular technology stocks.

Whereas fledgling Internet-related stocks were the big story early in the year, the shares fueling the latest gains in the tech sector belong to some of the largest U.S. tech companies, including software firm Oracle Corp., which rose $1.63 to a record $106.69 on Thursday, and wireless phone giant Motorola Inc., which also hit a new high, up $3.06 to $144.81.

But their businesses, too, are increasingly focused on the burgeoning Internet economy and the concept of electronically linking consumers and businesses to each other via not only computers but also an array of other devices.

Wall Street bulls have argued that, although the tremendous gains in many tech stocks may be overdone, investors have been logical in focusing intently on these shares, because of the speed with which the Internet is transforming businesses, and commerce, worldwide.

“The transition from the real to the virtual economy is playing out everywhere, and it is accelerating,” said Jeffrey Applegate, investment strategist at brokerage Lehman Bros. in New York.

That also offers significant justification for the massive market values that investors have placed on many small technology companies this year in bidding their share prices sky-high, Applegate said.

“In the virtual economy, you can go global [as a business] much quicker than in the real economy,” he noted.

Applegate’s recommended portfolio for Lehman clients is fully two-thirds in tech and telecom stocks, he said, including such names as Intel Corp., Cisco Systems Inc. and EMC Corp.

Even so, he said, “Are we a little ahead of ourselves [in stocks’ rally]? Yes.”

Charles Crane, money manager at Key Asset Management in New York, notes that the criticism of the current market surge is that many investors in tech stocks know little about the actual businesses. What they focus on, instead, is merely that the stocks are moving up.

That style of “momentum” investing has long been criticized by respected, diligent stock-pickers such as Warren Buffett.

Yet, “If enough participants practice that strategy, it’s just as valid” as any other stock-picking strategy, Crane noted. “If enough people say the sky is green, it’s green.”

In any case, in the near term the catalyst for a significant market pullback isn’t clear, many analysts say.

Assuming the global economy makes it through the century changeover with minimal computer problems tied to the Y2K bug, investors worldwide could see that as yet another excuse to pour more money into stocks in January, some say.

Even cautious Wall Street pros note that the backdrop for stock markets is highly favorable, as the U.S. economy booms, growth accelerates in Europe, and East Asia continues its recovery.

“There’s a market correction looming out there, but this is not 1929,” said Crane. “The fundamental underpinnings are so much better, including that the economy is running so much better.”

Profits of major U.S. blue chip companies are expected to rise 19% in the current quarter versus a year ago, on average, according to analysts’ estimates. That gain is expected to be fueled by strong consumer spending domestically and a rebound in demand in Asia.

In 2000, analysts now expect U.S. corporate earnings to rise 17%--providing further support for the bull market in stocks, optimists argue.

Still, historically the usual slayer of bull markets is rising interest rates. And although the U.S. stock market has largely shrugged off the jump in bond yields this year to two-year highs--as the Federal Reserve has raised its benchmark short-term interest rate three times to slow the economy--many analysts worry that further Fed rate hikes in 2000 could deal a hard blow to the equity markets.

“The bond market has gotten the [Fed’s] message,” said Paul Kasriel, economist at Northern Trust in Chicago. “The stock market hasn’t.”

If Y2K passes without meaningful incident, however, “I think everybody [on the Fed policymaking committee] is going to be all over the tape talking about tightening” credit further in 2000, Applegate said.

Whether that will be enough to trigger a sharp pullback in the market’s hottest tech and telecom stocks remains to be seen, however.

In any case, the Nasdaq index’s rise this year has been so dramatic that even a 35% drop from here--a serious bear market by any measure--would only wipe out the index’s gains since Aug. 12, and still leave it up 18% since Jan. 1, 1999.