As Dow Jones Heads Toward 5,000, Experts Warn of Bumps Along the Way
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Laura Weston cheered when she first heard about the Dow Jones industrial average breaking through the 4,000-point level last week -- the highest checkpoint the Dow has hit since its establishment back in 1884.
''I thought to myself, 'Oh good, I've made a little money,' '' she laughs. But Ms. Weston, who owns shares in several mutual funds and some utility companies, regrets not having bought additional stocks. ''The Dow will eventually reach 5,000 points. But I think it may take a little while to get there,'' says Weston, who works for a theater company in Sacramento, Calif.
She's probably right. Among stock market professionals, the consensus is that while the Dow will most likely move towards 5,000 points, it may not happen for a year or two.
The Dow showed some slippage early Friday, the day after reaching 4,000 points, as some investors took profits on their holdings after the government released a stronger-than-expected report on durable goods. But prices then moved on to close at another new high, 4,011.74.
Some long-time market watchers urge individual investors not to get overly euphoric about the recent uptick in the Dow.
''There's no magic in reaching 4,000 points,'' cautions Rao Chalasani, chief market strategist for investment house Kemper Securities Inc., in Chicago. ''The number is purely psychological. It has no real relevance to [fundamentals within] the market. We've been counting on the Dow reaching a target of around 4,300 points.''
Mr. Chalasani says there could now be some profit-taking in the market, and even a minor price dip in the months ahead. But any such ''correction'' would ''probably not be huge, only around 3 to 5 percent,'' he says.
ADDITIONAL market gains now largely depend on the direction of interest rates -- which depends on the monetary policy of the Federal Reserve, experts say. It has raised interest rates seven times in the last year in order to restrain inflation.
If the Fed can ensure a ''soft landing'' for the economy, and prevent either a new round of inflation or a recession, the stock market should keep on climbing, says Joseph Tigue, managing editor of ''The Outlook,'' a financial journal published by Standard & Poor's Corporation, New York. Given evidence of slowing, such as less-brisk home sales in some regions, Standard & Poor's expects some consolidation in the market, followed by gradual gains in stock indexes, Mr. Tigue says.
The S&P 500, which is a broader measure than the 30-company Dow, also set a new record last week, rising to 488.26, up 6.14 for the week. What is reassuring to analysts like Mr. Tigue is that underlying fundamentals, such as price-to-earnings ratios on both the Dow and the S&P 500, are flashing ''steady-as-you-go'' signs. The P/E ratio on the Dow is about 19; on the S&P 500, around 13.5. In both cases, the numbers are far below the lofty levels that prevailed before the market crash of 1987, when stocks were clearly overpriced. The one somewhat worrisome statistic: the dividend yield. On the S&P 500, for example, the dividend yield is now 2.7 percent.
''Anything below 3 percent is usually considered somewhat of a danger signal,'' Tigue says.
The recent upswing in the market is based on a perception ''that the economy is slowing and that the Fed may not need to raise interest rates again,'' or, if it does, ''not by much,'' says Hildegard Zagorski, an analyst with investment house Prudential Securities Inc., here. And many investors, she says, have been pulling out of overseas stocks, scared by the crisis in Mexico, and buying US multinational companies instead. This is pushing up stock prices in the US.
''There's just a lot of momentum now'' in US stock markets, says Steven Adler, president of ASM Fund, an open-end mutual fund based in Tampa, Fla. Mr. Adler is particularly happy about last week's surge in the Dow: the ASM Fund, with $19 million in assets, tracks the Dow. That is, the fund carries the same 30-stocks that are included in the 30-stock Dow. When the Dow rises, so too does the ASM Fund.
ADLER says institutional money managers will now start to shift cash assets back into equities, in part based on favorable growth projections abroad in industrial nations, as well as in some developing and emerging-market nations. Dow-listed companies should do particularly well, he says. ''Half the business the Dow companies do is overseas,'' he says.
For the time being, investors undoubtedly feel somewhat wealthier -- on paper at least. The Wilshire Associates Equity Index, which is the market value of stocks listed on the New York Stock Exchange, American Stock Exchange, and Nasdaq, ended the week at $4.8 trillion, up $49.873 billion from the previous week. A year ago the index stood at $4.66 trillion.