Are we headed for a 10,000 level Dow?
Globe and Mail
Dow surges past 8,000
Encouraged by robust earnings, low interest
rates, investors send markets to record highs
Thursday, July 17, 1997
By Stephen Northfield
Investment Reporter
The Dow Jones industrial average blew through 8,000 for the first time yesterday, propelled by
rising earnings and falling interest rates.
After a week of flirting with the milestone, the blue-chip index of 30 stocks breached the 8,000
mark just 11 minutes after the opening bell, fuelled by benign inflation news and a raft of strong
profit reports from corporate heavyweights.
The Dow ended the session at 8,038.88, up 63.17 points, and would have finished higher had it
not been for Eastman Kodak Co.'s $8.37 (U.S.) slide to $68.50, which took 31 points off the
index.
Records were shattered across the board. The Standard & Poor's 500-stock index added 10.83
points to 936.59 while the Nasdaq Stock Market composite index climbed 38.52 points to
1,580.63. Canadian equities joined the party, with the Toronto Stock Exchange 300-stock
composite index soaring 88.88 points to 6,744.81, also a record.
The significance of the Dow passing 8,000 is definitely in the eye of the beholder. For the bears,
the milestone is yet another symbol of an unsustainable frenzy for stocks that has gripped not just
Wall Street but Main Street as well. For the bulls, it's just another signpost on the way to 10,000 --
or better.
"I think that it's extremely positive," said Alice Hook, first vice-president at McDonald & Co. in
Cleveland. "There is a tremendous amount of cash out there, there is no inflation and as much as
people would like to deny the fact that this market may continue to run and that a correction is
looming, I say that this market can go a lot higher."
"I don't think it's any more significant than the fact that the market has made so much progress
recently," said a bearish Ricky Harrington, senior vice-president at Interstate-Johnson Lane in
Charlotte, N.C. "It means that we are still in a real mania or upside stampede, something that we
have not seen maybe but once this century, at least in this country."
The Dow has been steaming through milestones at a startling pace. The blue-chip index took out
7,000 on Feb. 13, just four months after topping 6,000 on Oct. 14, 1996. The 5,000 level was
crossed on Nov. 21, 1995, 10 months after the Dow broke through 4,000 on Feb. 23 of that year.
By way of comparison, the Dow took from 1928 until 1972 to cross the 1,000 marker.
Of course, the milestones are getting easier to breach, mathematically speaking. The move from
7,000 to 8,000 is a 14.3-per-cent gain, while the advance from 6,000 to 7,000 represents a
16.7-per-cent rise.
There's not much mystery about what's been fuelling the market rally, which kicked into high gear in
late 1994. Strong earnings growth, swooning interest rates and low inflation have created a
new-perfect environment for stocks.
There was more good news on all fronts yesterday. A slew of companies posted
better-than-expected earnings, including General Motors Corp., Lucent Technologies Inc. and Intel
Corp., which reported its earnings after the market closed Tuesday. Kodak was a big exception,
reporting a 16-per-cent slide in second-quarter profit.
Meanwhile, the U.S. consumer price index edged ahead just 0.1 per cent in June, reassuring
investors that inflation remains in check despite seven years years of uninterrupted economic
expansion. Bonds rallied on the news, with the yield on the U.S. long bond dipping below 6.5 per
cent.
The rally is drawing buckets of cash into mutual funds, providing a steady source of fuel to sustain
the market's advance. In June alone, $18-billion flowed into U.S. mutual funds, down slightly from
$20.1-million in May, but above the average of $16.3-billion a month over the past year. Net sales
of Canadian mutual funds were $30.5-billion (Canadian) over the first six months of the year, up
from $20.8-billion in the year-ago period.
Some, such as Mr. Harrington, believe that the market is way overvalued. "I've traded the market
for a little over 30 years and anyone with a historical perspective has got to be concerned about
this market. . . . I don't think you can justify what's happened either on a technical or fundamental
basis."
The analyst said the rally has been fuelled to a large degree by the sheer volume of cash being
plowed into the market, a factor that can't be counted on to last forever. In addition, the surge in
foreign buying of U.S. government bonds over the past several years, particularly by Japanese
investors, has helped sustain the low-interest-rate environment that's been the catalyst for the
market. That too could change, he added.
But other market watchers see more upside, while cautioning investors against complacency. "Sit
back, enjoy the ride, but keep one eye open," said Ron Meisels, president of P&C Holdings in
Montreal.
Despite investors' glee over runaway returns, market-sentiment surveys suggest that there is still a
fair degree of caution out there, which means that there's cash on the sidelines, he said. "There's
money out there, people are still cautious and worried and this is a good thing."
From its inception in 1928, it took 44 years to hit the 1,000 mark.
It's taken just 25 years to reach 8,000
Jan. 8, 1987: Dow reaches 2,000
April 17, 1991: Dow reaches 3,000
Feb. 23, 1995: Dow reaches 4,000
Nov. 21, 1995: Dow reaches 5,000
Oct. 14, 1996: Dow reaches 6,000
Feb. 13, 1997: Dow reaches 7,000
July 16, 1997: Dow reaches 8,000
Source: New York Times, Datastream |
