Market Smashes Another Barrier Dow Has Shot Up 31 Percent Since January And Topped 5,000 Tuesday
The Dow Jones Industrial Average closed above the 5,000 mark for the first time Tuesday, the latest milestone for a stock market that has smashed records all year.
The Dow, which began the year at just over 3800, has climbed an astonishing 31 percent since Jan. 1. And while few are predicting the market can keep up its torrid pace, economists and money managers remain surprisingly upbeat about the future.
“People who say the stock market shouldn’t be at these levels are all wet,” said Nancy Kimelman, chief economist at Technical Data in Boston. “Fundamentally this market has room to grow.”
The conditions that have allowed stocks to soar - moderate growth, rising profits, low inflation and low interest rates - show no signs of going away. A few bullish money managers say the Dow could hit the 6000 mark in the next year or two.
On the other hand, some money managers are predicting the good times could end soon. They say a variety of things - from a squeeze on profits to a breakdown of budget talks in Washington - could serve as a catalyst for a correction.
The Dow Tuesday climbed 40.46 to close for the day at 5,023.55. The index touched 5,000 Monday, but failed to finish at that level.
The Dow, an index of 30 big companies, has been used to measure the stock market’s progress since 1928. It took the Dow 44 years to break through the 1,000 mark. It then took 15 years to reach 2,000, four years to reach 3,000 and another four years to reach 4,000. The leap from 4,000 to 5,000 took just nine months.
“This is the greatest bull equity market ever,” said Allen Sinai, chief economist at Lehman Bros., a New York investment firm.
What’s been driving the market? Analysts can tick off a long list of reasons, from the boom in the technology business to the steady flow of money pouring into mutual funds. But they consider three factors especially crucial. Those include:
A successful soft landing. It’s hard to believe, but at the beginning of the year, the stock market’s greatest fear was an economy that was too strong. Coming off a very solid 1994, investors figured that the economy would continue to grow rapidly, pushing up interest rates and inflation. That never happened. Thanks to a series of interest rate hikes by the Federal Reserve, the economy slowed down without crashing, a “soft landing” in the language of the markets. The resumption of moderate growth has convinced the market that the current expansion, already in its fifth year, can go on for some time.
Low inflation. Rising prices were another big fear early in the year. If the economy was going to grow rapidly, the thinking went, prices and wages would grow along with it, hurting profits and increasing the chance of further interest rate hikes by the Fed. But the slower economy stopped inflation dead in its tracks.
Consumer prices are expected to rise less than 3 percent this year, the same pace as last year. Low inflation has translated into sharply lower interest rates. Mortgage rates, which were at the 9 percent level at the beginning of the year, are currently under 7.5 percent. Low interest rates make life easier for consumers and businesses; they also make stocks a more attractive investment than bonds or certificates of deposit.
Rising profits. Common sense would tell you that in a slow-growing economy, U.S. companies would have a hard time boosting earnings. In this case, common sense would be wrong. Profits are expected to grow about 18 percent this year, far above expectations.
“Rising productivity has been the name of the game in this business cycle,” said Donald Dates, director of research at Keystone Investments, a mutual fund company in Boston. Simply put, rising productivity means companies are doing more with fewer workers.
The trick has been accomplished by the greater use of computers, mergers in many industries, and a steady stream of layoffs. The biggest names in American business - from IBM to AT&T - continue to cut their payrolls. The cutbacks are bad news for workers, but they keep profits growing.
The optimists look for more of the same in 1996. “We won’t see 30 percent gains, but we could see 9 to 13 percent,” said Sinai. Along with other optimists, Sinai expects the Fed to cut interest rates in the near future, always a plus for the stock market.
More cautious money managers worry most about profits. “I think it is going to be tough to keep up the momentum,” said Edward Riley, chief investment officer at the Private Bank, part of the Bank of Boston. Riley questions whether U.S. companies can keep pulling rabbits out of the hat in a bid to grow profits in a slow economy.