The Dow at 7000 Investment gusher: Near-perfect economic conditions fuel unprecedented bull market.

February 17, 1997

WHAT GOES UP must. . . must what? Have those raging bulls on Wall Street managed to repeal the law of gravity? With the Dow Jones average hitting the 7000 mark Thursday, only 82 trading days after passing 6000, perhaps the only answer is arithmetic. It took a 50 percent gain for the stock market average to move from 1000 to 2000 a decade ago. To get from 6000 to 7000 required a mere 17 percent jump. To get to 8000 will require another rise of only 14 percent.

And so on. The higher the Dow goes, the less the impact of volatility. Thus, a 100-point move, either way, at today's stratospheric levels is equivalent to a 50-point shift when the Dow was at 3500 four years ago. The wary investor should be prepared for price swings that, in an earlier day, would trigger instant vertigo.

What insiders watch is the price-earnings ratio. Right now it stands at more than 19, meaning that the average equity on the Big Board is trading at a price equal to 19 times a company's yearly earnings. Anything more than 20 has long been regarded as the red danger zone. Wall Street bears cite this figure to justify their caution, but they are a bedraggled group. Bulls brag their only error has been to low-ball forecasts that once seemed phantasmagoric.

Even if the law of gravity has been repealed, the law of supply and demand has not. Perhaps the major force pushing the market up has been too few choice stocks and a gusher of dollars seeking investment opportunity. Spurred by company-subsidized retirement plans, $222 billion went into stock mutual funds last year. This has been a blue-chip phenomenon; small company equities have performed more modestly than corporations implementing stock buy-backs plus mergers and acquisitions.

Even a major correction should not be interpreted as a sign the Wall Street frenzy is a Ponzi scheme. What it reflects are near-perfect economic conditions: low inflation, low interest rates, steady growth in productivity and earnings, and some catch-up in average real wages. Stock market analysts aren't not the only ones caught with their estimates down; ditto the Congressional Budget Office, which has constantly revised deficit forecasts downward as unanticipated revenues pour into the Treasury.

Ironically, one factor that might affect the outlook is the probable success of the business community's drive for lower capital gains taxes. Should this materialize, there could be a cash-it-in sell-off that might have a greater impact than more traditional components.

Pub Date: 2/17/97

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