Dow at 10000: jubilee or just a number?

The index dances with the five-digit mark, showing Americans'unflagging optimism in economy.

It's almost a five-digit Dow.

Any day now, goes the reasoning, the rampaging bull market could tip the Dow Industrial Average over 10000 - a numeric conquest that holds immense psychological meaning for millions of investors, even if it has little real impact on the US economy.

If and when the big event happens (the Dow closed Friday at 9876.35), it will be a reminder that Wall Street has become a money machine, making Americans feel good about their pocketbooks. The move above 10000 is also the kind of event that would help to reassure the nation that investors are optimistic.

"The average guy thinks he's wealthier than [he was] the day before," says John Serhant, a principal at State Street Global Advisors, a money management firm in Boston, which manages $500 billion in assets.

Still, professional investors say a leap above 10000 has little meaning. "It's like turning 40 - it happens once and the day after you are on to another adventure," says Denis Laplaige, president of MacKay Shields, which manages $31 billion.

Only last April, there were headlines when the Dow closed above the 9000 mark - especially the fact that it took fewer than 2-1/2 years to climb from 5000. If an investor in November 1995 had plunked $1,000 into the 30 stocks that make up the Dow, the investment would be worth $2,144 today, with dividends reinvested. That's not bad, considering savings accounts are paying 2 to 3 percent interest.

Of course, not all stocks have participated in the Dow's rise. While the Dow Average is up 6.4 percent for the year, the Standard & Poor's 500, a broader index, is up only 4.7 percent.

"The vast bulk of stocks has not participated in the latest advance," says Sam Stovall, a senior investment strategist at Standard & Poor's. He notes the Dow Average is made up of well-known companies such as IBM.

Although most investors are not invested in the Dow, its rise has helped to stimulate Americans' fascination with the stock market. State Street, for example, has one client with 5,000 employees, but the firm gets 10,000 calls per month from the workers as they track the value of their assets.

At Boston-based Fidelity Investments, the nation's largest mutual fund company, assets have grown from $405 billion at the end of 1995 to $781 billion in January. Fidelity gets 683,000 phone calls per day from its more than 15 million customers.

The market's rise has also sparked the rise of television shows with names such as "Hot Lips," dedicated to sating investors' desire for tips and timely information. At health clubs, sweaty joggers on treadmills watch the ticker tape slide by on television sets.

"We term it investo-tainment,'" says Mr. Serhant, who worries that investors may use just a little bit of information to make decisions.

The inflation apparition

If the investing climate has remained buoyant, it may be attributed in part to the backdrop of positive economic news. Last week, for example, the US Bureau of Labor Statistics reported the producer price index dropped 0.4 percent in February, signaling that wholesalers are not yet having to pay more for raw materials.

This recently prompted Merrill Lynch & Co. economist Gerald Cohen to declare, "Inflation is dead."

If inflation is dead, the economy is electric. Economists are raising their estimates for the first quarter of 1999, with some forecasters now predicting that gross domestic product (America's output of goods and services) is growing at a rate of 4 to 5 percent, a veritable boom for this time of year.

"It's the strongest economy I've seen without inflation," says Lyle Gramley, an economist with 45 years' experience and a former member of the Federal Reserve Board.

Behind the strong economy are a healthy labor market - the jobless rate is a low 4.4 percent - and buoyant consumers. In February, retail sales rose 0.9 percent. Mr. Cohen now expects consumer spending will grow around 5 percent in the first quarter, a very brisk rate.

In the past, such an economic boom would spur the Federal Reserve to hit the brakes. But the Fed is not expected to make any changes in interest-rate policy when it meets at the end of the month. "The circumstances are different than years ago," says Mr. Gramley, a consulting economist at the Mortgage Bankers Association in Washington. "We're now in a less inflationary world, so the Fed does not take preemptive steps."

Even if the Fed does not act, Gramley thinks the Fed may signal that its inclination might be to raise interest rates because of the strong growth rate. "That may scare the markets and cool the stock market," he says.

But Scott Grannis, a principal Western Asset Management based in Pasadena, Calif., says the Fed shouldn't even consider tightening rates. He notes that commodity prices are at a 20-year low and the dollar is strong, which gives American consumers a lot of buying power. "The Fed actually has room to ease," says Mr. Grannis, whose firm manages $47 billion.

A 'tired' market?

If the Fed does ease interest rates, it would help rejuvenate the market. Mr. Laplaige believes the market is running mainly on emotion as traders try to get the Dow over 10000.

"This is a very tired market, and it's running out of steam," he says. "Once we get past 10000, the question will be, are we overpaying?"

Serhant expects that a market with the Dow at 10000 will slow down. Instead of double-digit gains, he foresees 8 to 9 percent annual gains.

"This is not gloom and doom, but people will have to get used to more modest returns," he predicts.

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