CANADIAN OILPATCH / FINANCIAL MARKETS
October 15, 1996
Dow Jones breaks 6,000 as surging oil stocks propel blue-chip index decisively above milestone
After flirting with the 6,000-point mark a couple of times last week, the Dow Jones industrial average decisively broke through that milestone yesterday, propelled by surging oil stocks. "It had trouble around 6,000 last week, but [Monday] it went through it like a hot knife through butter," said Alan Ackerman, senior vice-president with SVP Fahnestock & Co. in New York.
The much-watched blue-chip index tacked on 40.62 points in modest, holiday trading to close at 6,010.00, the first time it has ended above the milestone. The Dow wasn't the only measure that celebrated a record close: both the technology-heavy Nasdaq Stock Market composite index and the Standard & Poor's 500-stock index--a much better measure of the broader market than the Dow--set new highs as well.
While the U.S. bond market was closed in observance of the Columbus Day holiday yesterday, the New York Stock Exchange was open for business. Both the Canadian bond and stock markets were closed for the Thanksgiving holiday.
Reports of fighting between rival Kurdish factions in Iraq sent crude prices soaring and the stocks of Texaco Inc., Exxon Corp. and Chevron Corp. sharply higher.
Market pros generally attach little importance to milestones such as the 6,000 number. "I'm racking my brains to think if there is anything important about 6,000," said Thomas McManus, equity strategist at Morgan Stanley & Co. in New York. Larry Wachtel, market strategist at Prudential Securities Inc. in New York, was more blunt: "It doesn't mean anything . . . the Dow hitting 6,000 is all well and good, but if you were hesitant at 5,999 and now you want to buy at 6,001, then I'd have to say that there is not much rationale to your purchase." But it does, Mr. Wachtel conceded, "confirm we are in a bull market."
And how. The 6,000 mark is the latest in a series of market milestones that the Dow is conquering with increasing frequency. The Dow closed above 5,000 for the first time on Nov. 21, 1995, just 10 months after taking out the 4,000 mark Feb. 23. By contrast, it took the current version of the Dow, established in 1928, until 1972 to crack the 1,000 level. (It is important to note that it is getting progressively easier for the Dow to pass the 1,000 marks: The advance from 5,000 to 6,000 represents a 20-per-cent gain, while the move from 4,000 to 5,000 required a 25-per-cent improvement.)
The Dow has advanced about 17.5 per cent this year, after surging more than 33 per cent in 1995's red-hot market. The Toronto Stock Exchange 300-stock composite index is holding its own against the Dow this year, rising 15.9 per cent after badly lagging the U.S. market in 1995.
The bull market, six years old by some analysts' count, has been fuelled by a stock-friendly combination of steady but moderate economic growth, low interest rates, benign inflation and the
wholesale conversion by the public to to perceived merits of investing in equities, especially via mutual funds.
Indeed, during the first nine months of this year, U.S. investors pumped nearly $178-billion into stock funds, easily exceeding the previous full-year record of $130-billion set in 1993.
Those numbers are all the more remarkable given that cash flows appeared to be drying up in June and July, the same period in which the markets sold off sharply. But what looked like the beginnings of a full-scale retreat by stocks turned out to be only a mid-summer pause. Cash flows into fund picked up again in August and September, and the markets pulled themselves out of the summer doldrums and advanced to new highs.
"There are three things that drive bull markets: earnings, interest rates and cash flow [into stocks]," Mr. Wachtel said. From that standpoint, things look fairly healthy, the analyst said. Judging by some of yesterday's numbers, profits remain quite strong. And while just a few weeks back the market had all but accepted the inevitability of a interest rate hike by the U.S. Federal Reserve, recent economic data suggest that the Fed may not be forced to intervene any time soon.
"What we're having is a reaction to low interest rates and increased confidence by consumers," Mr. Ackerman said. It's possible that interest rates may move even lower in the first part of 1997, he said.
Over the course of the past year or so, a number of prominent bulls have shuffled over to the bear camp, only to be proven wrong by the U.S. market's relentless climb higher. "The question is: What's going to do us in?" Mr. Wachtel said. He offers a number of possibilities--rising interest rates or a Democratic-controlled Congress among them. "But until one of these developments take root--wherever it comes from--it's difficult to stand in front of a speeding train."
Still, many analysts see the U.S. market as overvalued in terms of time-honoured fundamental measures such as price/earnings ratios or dividend yields. "It just appears to be hard to find
attractive values," Mr. McManus said.
While that doesn't necessarily mean the bull market is on its last legs, it does mean that it's more vulnerable because the stock market will be "less able to shake off challenges" such as rising interest rates or flagging profits, the analyst said.
That's one reason that Mr. McManus prefers the Canadian market over the U.S. market at the moment. He sees Canadian stocks as undervalued compared with U.S. issues, which should make the Canadian market a safer haven in the event of a meltdown in New York.
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