Sizzling stocks melt 5,000 barrier Milestone prompts some to wonder if market can keep rising

November 22, 1995|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

A day after flirting with the historic 5,000 mark before closing lower, the Dow Jones industrial average roared to historic highs yesterday.

The benchmark average of 30 blue chip stocks climbed 40.46 points to close at 5,023.55, as the Dow climbed past 5,000 before a late burst of computer-assisted program trading turned the rally into a rout of the bears.

Big moves in key Dow stocks, such as Caterpillar Inc., which jumped $3.75 to $59.375 after an analyst recommended the stock, and the $2.75 jump in Alcoa Aluminum Corp. led the blue-chip rise.

But stocks moved higher in the broader market as well, as the Standard & Poor's 500-stock index closed over 600 as well, its closing price of 600.24 topping a record set only Friday.

"You have got 25 years' worth of people in the market who have never seen a moderate-growth, low-inflation economy," said William R. Rothe, head of over-the-counter trading at Alex. Brown & Sons Inc. in Baltimore. "By a lot of historic measures, the market is a little ahead of itself. But you [have to] throw in the caveat that we are potentially looking at a different environment."

Late yesterday, stockbrokers and traders were ready to ruminate, mostly about whether the potential for a historic accord on balancing the federal budget is something that will change the world or merely give Wall Streeters grist for a week's gossip.

Some insisted that the market already has marked up prices to account for whatever benefit the budget deal might bring.

"We're up over 1,300 points [on the Dow] in 1995, which is a phenomenal number," said Rob Brown, chief market strategist at Ferris, Baker Watts Inc. in Baltimore. "To me, this looks like the last hurrah in a bull market. I've been selling into this."

A block down Pratt Street at the local office of Merrill Lynch, branch manager Greg Franks downplayed the significance of cracking 5,000. But, as his firm's slogan goes, he still sounded bullish on America.

"I think it's just a number," he said. "The market doesn't move according to numbers; it moves according to the value of companies and the economy."

Technology stocks have led the way through much of 1995, but Mr. Franks said the market is now favoring more traditional industrial and service companies that depend far more on a strong economy than on new technology. And he said that bodes well for many investors. "They want stability, predictability and profitability," he said. "And the market is telling you that's what it anticipates it's going to get."

The historic market march -- the Dow has nearly tripled since the depths of the 1987 crash -- reflects big changes in who is investing in the market and how.

Individual investors are far more active than in decades past, and have been lured into the market in droves since interest rates banks pay for savings declined sharply in 1992 and 1993. In particular, individuals have pushed hard into stock mutual funds and retirement accounts that demand particularly long-term-oriented investment approaches. Those strategies mean that fewer investors head for the sidelines during short-term market reversals.

"People are getting the idea that in the long run, common stocks are their best vehicle," Mr. Rothe said. "You get a lot of retirement money that comes in a fairly regular stream, people [investing] every week from their paychecks."

In the first nine months of 1995, the mutual fund industry added $516 billion to its base of assets under management, according to the Investment Company Institute, a trade group. The mutual fund industry now manages $2.7 trillion.

Locally, T. Rowe Price Associates Inc. now manages $46.7 billion in mutual fund assets, said Steven Norwitz, a company spokesman. That's up from $37.3 billion at the end of last year.

"The decline of interest rates has been of critical importance to this year's nearly 30 percent jump in stock prices," said John Lonski, chief economist for Moody's Investors Service, who noted that bank and bond market interest rates are down 1.8 percentage points from a year ago.

The drop also "has encouraged individuals to invest a larger portion of their savings in equities instead of bonds," he said.

People who got into stocks this year have been rewarded. The Dow is up 31 percent for the year as of yesterday's close, according to Bloomberg Business News. The Nasdaq index of over-the-counter stocks, which is heavily influenced by technology issues, fell yesterday but is still up 36 percent so far this year.

Mr. Brown thinks the market has come up too far.

Bulls such as Mr. Rothe argue that the market has been knocking down individual stocks and industries that are overvalued even as it has been marching higher overall -- and that the market took a significant pause last year even as the economy grew -- which reduces the risk of a major bear market any time soon.

"There has been a considerable rolling correction," Mr. Rothe said. "It takes froth out of the market even though the indexes are high."

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