Sizzling Dow: Will the Market Next Go to 7,000 - or 5,000?
BOSTON AND NEW YORK
How high the Dow?
As the stock market bull charges through the 6,000 barrier, small investors across the United States are wondering how long the stampede will last.
The Dow Jones industrial average closed above 6,000 for the first time on Oct. 14, less than 11 months after it first hit 5,000. Most of America was quietly enjoying the Columbus Day holiday. But on Wall Street, the bull market was celebrating the start of its seventh year in grand style.
On surprisingly strong earnings reports from companies such as General Motors, Chrysler, and Intel, the stock market again seems to have found its seemingly unstoppable upward momentum.
"This is a big media event, but in terms of what's really going on with the market a person has to look at the three major underlying fundamentals," says Larry Wachtel, a vice president with investment house Prudential Securities Inc., New York. The fundamentals are interest rates, corporate profits, and company cash flow. "The recent gains in the market all came after the Federal Reserve failed to boost interest rates in September," he says. "The underlying fundamentals remain on track. Profits and cash flow are strong. Change any one of these three components, and you could have a correction of some type."
So what's an investor to do?
Many financial experts stick with time-tested advice: Don't make radical shifts in your portfolio, buying or selling.
History has shown that stocks outperform bonds over the long term. And even when investors buy at a market peak, they can make tidy gains over the course of decades. American Funds Group, for example, notes that if you had put $5,000 a year into stocks at the market peak each year since 1954, your portfolio would have been worth almost $3 million by 1994 - when the Dow was at about 4,000.
Still, many advisers say that investors should buy in small chunks so they have a better chance of not jumping into the market just before a downturn - a method known as "dollar-cost averaging."
As always, the market's upward course has been marked by bumps and dips. In July, the talk on Wall Street was of a correction - and perhaps even a bear market - as stocks dipped temporarily.
But steadily rising earnings - the market's traditional fuel - have driven the market upward so far this decade. Paradoxically, skepticism has helped too. Some analysts have been making bearish predictions for a couple of years now, arguing stocks have become too richly priced. The pessimism provides a counterbalance - a platform from which the optimists send share prices up a "wall of worry."
But there's another factor that has come to be seen as crucial to the current bull market: inflows of money from small investors, particularly automatic payroll deposits into retirement plans.
Last year the value of household stock holdings outweighed home equity for the first time in decades, reaching $5.5 trillion in stocks compared with $4.2 trillion in homes, the Federal Reserve says. And now more than 1 adult in 3 owns stock or stock directly or through a mutual fund.
The presidential election has also been viewed by some as a "buy signal." Historically, stocks have done well in election years.
But some analysts, citing a relative decline in bearish sentiment on Wall Street, warn that a correction may come, possibly when investors least expect it.
"I think we'll see Dow 5,000 again before we see Dow 7,000," Arthur Micheletti, chief investment strategist at Bailard, Biehl & Kaiser in san Mateo, Calif., told The Wall Street Journal.
The election cycle itself could become a spoiler for next year. Traditionally, the first two years after an election have been the weakest for stocks in the four-year cycle.
But many analysts say earnings and interest rates will remain key.
The Federal Reserve has avoided raising short-term rates for several months, watching signs that the economy may be slowing down and avoiding inflationary overheating. Meanwhile, third-quarter earnings at many large corporations are coming in strong.
Mr. Wachtel says not to read too much into Columbus Day's 40-point rally. Trading volume was relatively light, and "half the move" of the 30-stock index came from its three oil stocks.