Dow's Surges to Close Above 10,000 Level

By WALTER HAMILTON

March 30, 1999 12 AM PT

TIMES STAFF WRITER

The storied Dow Jones industrial average rocketed to close above the 10,000 level Monday for the first time, marking another major milestone in a 17-year bull market fueled by--and now perhaps fueling--the best U.S. economy in a generation.

Less than a year after reaching 9,000 and a little more than three years after breaching 5,000, the blue-chip Dow jumped out to an early-morning gain and finished up 184.54 points, or 1.9%, at a record 10,006.78.

Fittingly, the day was marked by a fresh surge in leading technology stocks and news of another potential mega-merger--two of the dominant forces that have powered stocks higher in the 1990s.

After briefly surpassing but never ending above 10,000 three times this month, breaking the number came as a relief to many on Wall Street. At the New York Stock Exchange, New York Mayor Rudolph Giuliani and NYSE Chairman Richard Grasso tossed “Dow 10,000” baseball caps into a throng of cheering traders on the floor.

Although the figure itself is merely a calculation based on the sum of 30 major U.S. stocks--including Walt Disney, General Electric, Coca-Cola and IBM--its psychological significance is undeniable, many analysts say.

The Dow at 10,000 is not only a testament to the profound economic change that has swept the U.S. over the last two decades, but also is a reflection of how millions of Americans have pinned their financial hopes to the stock market.

“Dow 10,000 signifies what has been a Golden Age for investors,” said Alan Skrainka, the 37-year-old chief market strategist at investment firm Edward Jones & Co. in St. Louis. “This is going to impact my generation just like the Depression and the stock market crash affected my father’s generation. My father saw a world where people were waiting to see the next big market crash, while my generation was raised on the idea of long-term equity investing.”

Yet scaling 10,000 also is sure to fire up the already roaring debate over whether the U.S. stock market, like Japan’s in the late 1980s, is a gigantic bubble that must eventually burst--with potentially disastrous consequences for investors and the economy.

Some veteran Wall Street analysts say stock prices--or at least prices of major blue-chip stocks--have been bid up far higher than is warranted by underlying fundamentals, such as corporate earnings.

By some measures, investors are paying more for stocks today than ever before, relative to what companies generate in profit for their shareholders.

“The critical issue is whether . . . earnings are keeping up with advancing stock prices. And if they do, stocks can go to any level,” said A.C. Moore, chief investment strategist at Dunvegan Associates Inc. in Santa Barbara. But “limits start to appear not at round numbers, but when they pull away from their earnings stream. That’s a bubble and that’s what’s happening” now.

Precisely because so much of Americans’ wealth now is tied up in stocks after a decade of massive investment by workers of all income levels, the market’s continuing gains are helping to drive consumer spending and maintain the U.S. economy’s sparkling tone, experts say.

Investors, many saving for retirement, have $3.1 trillion in stock mutual funds alone today, versus a mere $246 billion in 1990.

The great fear, however, is that a prolonged market downturn from these heights could cause those same investor-consumers to slash their spending, exacerbating any economic slowdown that may develop in coming months or years.

But for now, Wall Street’s bulls say that crossing 10,000 underscores just how powerful low inflation, moderate interest rates and growing corporate profits--the hallmarks of the 1990s--can be in making stocks the preferred investment among individuals and institutions.

Inflation is inching up a quiescent 1.6% a year. Yields on long-term Treasury bonds, which influence mortgage and other consumer loan rates, are near 30-year lows.

As for the economy, California’s 5.6% unemployment rate, while higher than the nation’s rock-bottom 4.4% level, still is the lowest since the peak of the last economic expansion in mid-1990.

“People say, ‘The stock market is so extraordinarily overvalued,’ ” said Jim Paulsen, chief investment officer of Wells Capital Management. “I say: ‘True. But the character of the U.S. economy is equally extraordinary.’ ”

Indeed, though 10,000 was hardly imaginable when the Dow bottomed at 777 in August 1982 after a decade of high inflation and a ravaged economy, the stock market’s long climb has mirrored the renaissance of the American economy.

More than a few obstacles have tripped the bull run, including the horrific crash of 1987 (when the Dow fell nearly 23% in one day), the Gulf War in 1990, the Federal Reserve’s doubling of interest rates in 1994 to slow economic growth, and last summer’s Russian economic crisis, which sent markets reeling worldwide.

But as the economy’s performance has blown away naysayers in the 1990s, the public’s enthusiasm for stocks--which, after all, represent ownership of the economy--has proved extraordinarily resilient.

Today, an estimated 48% of U.S. households own stocks either directly or through mutual funds, compared with 32% a decade ago.

That’s helped to swell the value of the entire U.S. stock market to $13 trillion today, from $1 trillion in August 1982, according to Wilshire Associates in Santa Monica.

The Dow, which already is up 9% since December, has notched average gains of more than 25% a year since 1994.

And over the last year, the public’s interest in stocks has helped fuel one of the wildest manias in history: the explosion of many Internet-related stocks.

But with each step higher in the market, Wall Street reminds some of the Japanese market bubble in the late 1980s--which saw the Nikkei-225 index soar from 13,000 in 1985 to 39,000 by late 1989 amid euphoria over the Japanese economy.

After the crash of the early 1990s, the Nikkei today is at 16,000.

Yet the economic comparisons aren’t valid, most Wall Streeters say. Many argue that, absent either a sharp increase in inflation or a severe global deflation and depression, U.S. investors’ belief in equities as the premier long-term investment is unlikely to wane for long.

The stamina of small investors was credited last year with preventing the summer market downturn, in which the major indexes fell just shy of 20% from their peaks amid Russia’s crisis, from being more severe. As stocks in recent years have repeatedly rebounded from brief pullbacks, a “buy-the-dip” mentality has become ingrained in individual investors.

“I don’t see a lot of impediments out there that are going to swoop in and put this thing to rest,” said Joseph Battipaglia, chief investment strategist at New York-based investment firm Gruntal & Co. and one of Wall Street’s best-known bulls. “There are underlying economic, financial and political fundamentals driving investor confidence and inflation and those still remain very positive.”

Still, the long bull market shows signs of weakness.

While the Dow and other barometers of large-stock performance have thrived in recent years, shares of many small and mid-size companies have languished.

Historically, it has been an ominous sign for bull markets when only a few stocks are pulling the market ahead.

“If you owned the right stocks, you could join in the celebration,” said Hugh Johnson, chief investment officer at First Albany Corp. “But many people don’t feel like joining in.”

The market demonstrated some of its contradictory nature Monday. Technology leaders such as Microsoft and IBM had strong gains, as did big-name stocks in other industries, such as American Express and Wal-Mart.

On the merger front, Britain’s BP Amoco said it’s in talks to buy Atlantic Richfield Co., sending major oil stocks higher.

Yet in the market overall, so-called breadth--winners versus losers among individual stocks--was modest considering the strong advance in the Dow. In fact, in seven of the last 10 weeks, the number of declining stocks has outnumbered gainers on the NYSE, Johnson said. And in nine of those weeks, more stocks have hit new 52-week price lows than 52-week highs.

Even so, some Wall Streeters say that eclipsing 10,000 could pull the entire market higher if investors who have remained out of stocks are suddenly prompted to buy in. But that phenomenon might be short-lived, they say.

“There is a good foundation for the strength of the market,” said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. “At the same time, I view 10,000 as the last step in a staircase.”

At a minimum, vaulting 10,000 alleviates anxiety among some Wall Street experts who had fielded nonstop questions from the media and others about just when it would do so.

“For me, it’s absolutely ‘thank God,’ ” joked Peter Canelo, a bullish investment strategist at Morgan Stanley Dean Witter in New York.

For many Wall Street pros, the question of how high the market can go is only a question of how long the U.S. economy’s amazing run can continue.

An active Federal Reserve helped bring inflation down in the 1980s, and with it interest rates. That has continued in the 1990s, underpinning stocks and the economy.

If tax cuts spurred the 1980s economy, technology’s boom has been the centerpiece of the 1990s--along with a merger wave spurred by the integration of economies worldwide and the battle for competitive edge.

Stocks also have been helped by fortuitous events such as the fall of communism, which allowed the government to scale back heavy defense spending, a factor in today’s budget surpluses.

But the market’s gains also have stemmed in part from the corporate downsizings of the late 1980s and early 1990s in which broad swaths of workers saw their jobs eliminated. In a scenario played out time and again in recent years, companies announced layoffs and their stocks jumped immediately.

In the long run, however, many economists credit the restructuring wave with boosting productivity, positioning U.S. multinationals for a cutthroat global marketplace and paving the way for the emergence of new industries.

“Even though we’ve lost employment in the auto industry, we’ve created a lot more jobs in the software industry, which didn’t exist 20 years ago,” Sohn said. “And not only have we created more jobs, but higher-paying jobs.”

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The Dow in the ‘90s

The Dow Jones industrial average finished above 10,000 on Monday, the latest milestone in a decade of stock market surges. In 10 years the Dow has gained more than 7,200 points, a 263% increase.

Dec, 31, 1989: 2,753.20

Monday’s close: 10,006.78

Source: Bloomberg News

Diverging paths

The Dow Jones Industrial Average, a yardstick of 30 big-company stocks, has greatly outperformed the Bloomberg Orange County index, a measurement of mostly small-company stocks, since the the current bull market began the most recent leg of its surge last fall. Here’s how the Dow and the Bloomberg OC indexes have fared over the past six months, starting from an index of 100 of Sept. 29.

Source: Bloomberg News

Winners & losers

Here are the best and worst performing stocks in Orange County, that trade for $2 or more, over the past six months.

Winners

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Company % change Monday close Powerwave +214% $26.88 MotorVac +169% 2.19 Mossimo +159% 11.00 Emulex +140% 31.88 Quiksilver +126% 42.19

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****

Losers

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Company % change Monday close Impac Mort. -64% 4.63 Ingram Micro -64% 19.50 SM&A; -60% 9.88 STM Wireless -60% 2.50 Data Processing -59% 12.00

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