Is All This Drama the Dow 1,000 Saga Times 10?
Of all the ways a Wall Street professional could cement his or her place in market history, most would probably not choose this route: “I was the person who kept the Dow Jones industrial average from closing above 10,000.”
If fate is extremely unkind to Morgan Stanley Dean Witter computer analyst Thomas Kraemer, he may wind up with that distinction. On Friday, of all days, Kraemer decided to cut his 12-month price target for IBM to $195 from $210--a move that helped trigger a rout in IBM shares, and with them the market overall.
After rising as high as 10,085.31 early in the day, the Dow sank to finish off 94.07 points at 9,903.55. IBM, the highest-priced issue in the 30-stock Dow and thus the one that affects the index most, slid $9.06 to $168.56.
The disappointment was palpable at the New York Stock Exchange--not to mention among business editors everywhere, who’ve been working for weeks to ready massive Dow 10,000 special reports for publication or for the airwaves, in case it ever happens.
Shouldn’t it be enough for everyone that the century-old Dow index poked above 10,000 three times last week during trading? Nope. That’s like a horse that comes on strong early in a race but fails to finish.
With the Dow, major milestones are there to be passed, not just danced around. And especially today: It’s only the very big-name stocks, the type that populate the Dow, that are keeping this bull market running. The rest of the market is struggling.
Should the Dow stall now without confidently closing above 10K, Wall Street will be forced to deal with some very unpleasant memories about another milestone: the 1,000 mark.
Early in 1966, amid the great Vietnam War-era U.S. economic expansion (also known as the guns-and-butter era, when the federal government decided we could have both by simply running a budget deficit), the Dow topped 1,000 for the first time on four days--two in January and two in February.
Closing above that mark would have been a fitting achievement for a bull market that had lifted the Dow 87% from mid-1962. (That is about the same amount today’s Dow has gained since early 1996, when it was at 5,300.)
But those 1,000 piercings in 1966 occurred during trading; in each case the Dow fell back by the end of the session to close below 1,000.
That might have been no big deal, except for what followed: The Dow tumbled nearly 26% between its February intraday high and October of that year.
The 1,000 mark was to remain out of reach for another two years, when the Dow would make another run for it. It reached an intraday high of 990.99 on Dec. 13, 1968.
But that, too, proved to be a near-term peak that gave way to an even deeper decline--one that would take the Dow down 36%, to 631, by May 1970, amid a sharp U.S. economic recession.
The Dow recovered again in 1971, and in 1972 was carried aloft in part by the hunger for what then were called the “Nifty Fifty” stocks, a small fraternity of blue-chip growth shares that everyone wanted to own and no one wanted to sell. Among them: Eastman Kodak, Xerox and Avon Products.
On Tuesday, Nov. 14, 1972, the index that Charles Dow first compiled in 1896 at a value of 40.94 made history with its first close above 1,000. The index rose 6.09 points, or 0.6%, to finish at 1,003.16. It fell back on Wednesday but then topped 1,000 again on Thursday and remained above that level into January 1973.
But as with the unsuccessful attempts to hurdle 1,000 in 1966 and 1968, finally getting there turned out to be a great sell signal, not a buy signal.
The Dow would peak at 1,051.70 on Jan. 11, 1973, and over the following two years would proceed to lose 45% of its value, finally bottoming at 577.60 on Dec. 6, 1974.
Of course, simply crossing 1,000 didn’t cause the Dow’s subsequent collapse. There were many great reasons to bail out of stocks in 1973 and ‘74, including oil’s initial price surge (as OPEC was born), soaring interest rates and the resignation of President Richard Nixon in the midst of the Watergate scandal.
Still, the stigma attached to 1,000--that it was a ceiling the Dow couldn’t decisively break through--remained intact throughout the 1970s, as the Dow stalled, then pulled back each time it topped 1,000 in 1976, then in 1980, then in 1981.
It wasn’t until late 1982 that the Dow would sail through 1,000 and not look back, ending the ‘80s at 2,753, reaching 5,000 in November 1995 and dealing with 6,000, 7,000, 8,000 and 9,000 without breaking much of a sweat.
Is there any good reason why 10,000 should be a major obstacle for the Dow--let alone the kind of ceiling that 1,000 was for so long?
Probably not, if interest rates stay relatively subdued, the U.S. economy continues to roll along, and signs of economic (and stock market) recovery in Asia continue to emerge. (Tokyo’s beleaguered stock market on Friday reached its highest level since July.)
As for valuations, everybody knows that U.S. blue-chip stocks are very high-priced relative to earnings. They knew that in 1972 as well with the Nifty Fifty stocks. But it took more than just knowing that fact to cause a market collapse. The economic fundamentals had to begin to collapse as well.
Still, the stock market may be all about corporate earnings and interest rates in the long run, but in the short run it’s all about psychology, and where the mass of investors reside on the spectrum that reads “Greed” at one extreme and “Fear” at the other.
The stock market today may be as dominated by “momentum” players as it has ever been. Momentum players need action. If they begin to believe that prices aren’t going up any more, many will assume that prices must begin going down.
It doesn’t help that, as a nation, our attention spans and patience have arguably gotten a lot shorter. It won’t take long, should the Dow struggle with 10,000, for a lot of Wall Street pros to declare that there’s a “problem”--whether there is or not.
Could the rest of the market march ahead even if the Dow were to stop here for some indefinite period? That’s the dream of more than a few investors. With so many smaller stocks sinking this year even as the Dow has gained 7.9% since Dec. 31, it would seem healthy for smaller stocks to catch up while blue chips take a breather.
But it hasn’t worked out that way since the early ‘90s, and many market veterans don’t think it will happen soon. Psychologically, the entire market probably needs Dow 10,000 to become history, and sooner rather than later.
Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
