The Dow Jones industrial average, the best-known measure of the stock market's health, stormed through the 4,000 level for the first time yesterday on a wave of investor confidence about the direction of interest rates and the economy.
The Dow, an index of 30 of America's biggest companies, first broke through 4,000 points at 9:58 a.m. It ended the day 30.28 points higher, closing at 4,003.33.
The collapse of a 1,000-point barrier always carries some drama, but most investors consider it a purely emotional event, with no ++ practical meaning for the market. Still, in an arena often ruled by emotions, the news of a Dow 4,000 carries some weight, analysts said.
"Psychology is a major factor in financial markets, and this was probably one of the biggest" barriers, said Gail Dudack, market strategist at S. G. Warburg & Co.
It took the 99-year-old Dow index 76 years to reach the 1,000 level, 15 more years to hit 2,000, and then four years each for the next two 1,000-point intervals.
Most investors consider the Dow only a moderate indicator of the overall state of the stock market. It's the oldest popular index, and certainly the most famous. But it comprises only 30 big industrial companies in an economy that has been shifting toward service and technology industries.
The Standard & Poor's 500 index and the Nasdaq composite index, which includes more than 4,000 companies, are far broader market barometers. Both closed higher yesterday, although only the S&P; index hit a record high.
"We're not popping champagne corks," said Stephen Shobin, a technical analyst at Lehman Bros. "In fact, we're part of the bearish crowd that thinks the market doesn't have a lot higher to go.
"Ironically, the market often consolidates and goes sideways after breaking out through a big barrier."
Still, some believe the news itself could add to the market's momentum. "I would expect it to excite a lot of comment, and it's going to startle a lot of investors who put their money overseas," said C. Frazier Evans, senior economist at Colonial Mutual Funds. Some of that money, he said, "will come washing back overseas."
Most of the market's action took place in the first hour of trading yesterday, when investors gave the index a 40-point surge.
They were buoyed after Wednesday's remarks by Federal Reserve Chairman Alan Greenspan, who said the economy appears to be cooling off.
The index rose an additional 10 points or so in the early afternoon to an all-time high of 4,020.49, but the market took back 17 of those points, partly because of computer-driven selling late in the day. About 1,400 stocks rose and nearly 800 fell on the New York Stock Exchange, where about 394.7 million shares traded hands.
The central bank's interest-raising campaign that started a year ago effectively halted the stock market's upward momentum. The Dow rose more than 200 points in January 1994, hitting a peak of 3,978 on Jan. 31, less than a week before the Fed made the first of what would be seven rate increases in an effort to head off inflation.
Higher interest rates pose two threats to the stock market. They make fixed-income investments, such as bonds and bank certificates of deposit, more attractive relative to stocks. And higher rates tend to dampen the economy, which slows down corporate profit growth.
During the past year, the Dow and the other measures of stock market activity have moved mostly sideways.
But in his second day of testimony on Capitol Hill yesterday, Mr. Greenspan repeated his assertion that the Fed would be prepared to reverse course and even lower interest rates if the economy shows signs of slowing down further.
"He was confirming what a lot of private forecasters were saying anyway, but when he says it, it carries a little more weight," said Paul W. Boltz, chief economist at Baltimore-based T. Rowe Price Associates Inc.
If the Fed has been successful in slowing the economy enough to stave off inflation, there should be very little in the way of more stock market gains, Mr. Boltz said.
"We're not talking about a recession here at all," he said. "In fact, what we're talking about is the lovely prospect of staying at full employment for a long time."
Dow Jones components J. P. Morgan, Procter & Gamble and Philip Morris Co. led the index higher. Morgan rose $1.375, to $63; Procter & Gamble was up 75 cents, at $66.50; and Philip Morris gained $1.25, to close at $59.50 after an Indiana lawsuit over the addictiveness of cigarettes ended in a mistrial.
Shares of financial companies were among the biggest gainers yesterday, propelled by growing confidence that interest rates won't increase much this year, and stock and bond underwriting will rebound.
Merrill Lynch & Co. added 87.5 cents, to $40.375, and the Federal National Mortgage Association (Fannie Mae) advanced $1.125, to $79.375. Citicorp rose $1, to $44.75, and Morgan Stanley added $1.625, to $66.875.
Among local stocks, Alex. Brown Inc. rose $1.25, to $37.125; T. Rowe Price added 75 cents, ending the day at $32.25; and McCormick & Co. was up 12.5 cents, closing at $21.875. PHH Corp. lost 12.5 cents to close at $37.375, and Baltimore Gas & Electric Co. also dropped 12.5 cents, to $24.25.
Despite the enthusiasm in the market this week, some traders were pleased that investors have not gone overboard with optimism. "This hasn't been a real frothy market," said Barry Berman, managing director for equity trading at Robert W. Baird & Co. in Milwaukee.
"Usually when we go through [a 1,000-point level] there's kind of a warm, toasty feeling among investors," said economist Alfred F. Kugel, a consultant to mutual fund company Stein, Roe & Farnham Inc. in Chicago.
"But it doesn't last for more than a day or two, and then people stop talking about it," Mr. Kugel said.
THE DOW TODAY
The Dow Jones industrial average's 30 stocks, in order of their percentage weighting in the index:
Aluminum Co. of America
International Paper Co.
International Business Machines Corp.
Proctor & Gamble Co.
United Technologies Corp.
Texaco Inc.
Exxon Corp.
J. P. Morgan & Co. Inc.
Philip Morris Cos. Inc.
General Electric Co.
Du Pont
Coca-Cola Co.
Minnesota Mining & Manufacturing Co.
Walt Disney Co.
Caterpillar Inc.
AT&T; Corp.
Eastman Kodak Co.
Sears Roebuck & Co.
Boeing Co.
Chevron Corp.
General Motors Corp.
Merck & Co.
AlliedSignal Inc.
Goodyear Tire & Rubber Co.
American Express Corp.
McDonald's Corp.
Union Carbide Corp.
Westinghouse Electric Corp.
Bethlehem Steel Corp.
Woolworth Corp.