Staid old Dow industrials could get to bouncing now

Investing

March 24, 1997|By Bill Atkinson

THE WAY the Dow Jones industrial average has been bouncing, it should come with a surgeon general's warning: "Paying too close attention to the index can cause physical and mental harm."

But Dow watchers are unlikely to get relief.

Even after Federal Reserve Chairman Alan Greenspan makes his decision on interest rates this week, experts say, the index will become even more volatile than in the past because of the addition of four new high-performance stocks that could supercharge the Dow.

"This will accelerate the moves," said Rob Brown, chief market strategist with Ferris, Baker Watts Inc.. "Theoretically, it could hype the Dow."

The Dow was retooled a week ago to reflect America's changing economy. Added were four all-star companies: medical products concern Johnson & Johnson, retailer Wal-Mart Stores Inc., computer maker Hewlett-Packard Co. and diversified financial concern Travelers Group Inc.

Ousted were Bethlehem Steel Corp., retailer Woolworth Corp., oil producer Texaco Inc. and media and electronics concern Westinghouse Electric Corp.

They were dumped because they no longer represent American industry, which these days is driven by technology and the service industry. Some believe that the additions, made by the editors of the Wall Street Journal, which publishes the index, will drive the Dow higher, faster.

"It may be putting some nitro into the Dow's fuel mix," said Edward Yardeni, chief economist with Deutsche Morgan Grenfell in New York, and perhaps the most bullish bull on Wall Street because of his prediction that the Dow will reach 10,000 points by 2000 or earlier.

"It adds a bit to the bullish side of the ledger."

Here's why the Dow could have more punch:

The four new companies are more potent performers. Their stock prices have jumped 27 percent on average in the last 6 1/2 months, with Travelers leading the pack with a 53 percent gain.

The four companies that were replaced rose an anemic 3.2 percent, with Bethlehem Steel the weakest link, falling nearly 20 percent.

The new stocks are 17 percent more volatile than the stock market, while the ones kicked out are 26 percent less volatile than the stock market.

"A point move for Westinghouse was a big day," Brown said. "Hewlett-Packard moves a point if somebody sneezes."

Brown's warning: "The faster they go up, the faster they come down."

"You are taking out the defensive stocks and you are putting in the offensive stocks," he added. "You are making the Dow more racy, more aggressive."

What troubles some experts is that unsophisticated investors will be lured into the stock market just because they see a rising Dow.

They don't understand that the Dow is an index made up of only 30 blue-chip companies, and that it doesn't represent the entire market, which has thousands of stocks, industry experts say.

And a rising Dow is a powerful force.

"I think people look at changes in an index like the Dow without thinking a whole lot about what caused it," said John Markese, president of the American Association of Individual Investors, a Chicago-based nonprofit education group with 180,000 members.

"It gets people moving," he said. "It is momentum. People buy change. Whenever markets move, they draw in money. It is a force that just pulls it in like a vacuum cleaner."

Last Monday, for example, the Dow closed up more than 20 points, while declining stocks outpaced gainers nearly two-to-one on the New York Stock Exchange, and the much broader Nasdaq composite index fell 13.51 points, which is equal to a 67.55-point drop in the Dow.

"If you were Rip van Winkle and you woke up Monday, you would say that the market was up 20 points," Brown said. "But the stock market really got hit."

So far, the new stocks haven't added much of a punch to the Dow; rather, they have been more of a stabilizing force.

The index fell 58.92 points on Tuesday, but it would have slipped an additional 8.44 points if the Dow still had Texaco and the three other ousted stocks.

The bigger swings are bound to come.

"You are going to see a more exciting average," Brown said.

"It will keep your attention centered."

Pub Date: 3/24/97

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