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Dow's New Height Not as Giddy as the Last One

Some say the revival of blue-chip stocks signals economic optimism. Others see a hint of fear.

October 04, 2006|Tom Petruno | Times Staff Writer

In less than seven years, the value of the typical U.S. home has risen 64%. The price of gold has doubled. The Russian stock market has rocketed nearly 800%.

And the Dow Jones industrial average just broke even.

The world's best-known stock index rose 56.99 points Tuesday to end at 11,727.34, finally topping the previous peak of 11,722.98 reached Jan. 14, 2000.

The day's advance, aided by another drop in oil prices, capped the Dow's long slog back from its 2000-2002 plunge, the worst in three decades.

Stock market bulls say the index's comeback is a sign of optimism about the nation's economy, given that the Dow's giants -- blue-chip names such as Boeing Co., McDonald's Corp. and Walt Disney Co. -- account for a colossal chunk of business activity.

"You have everything in place for a continuing bull market," said Neil Hennessy, whose Marin County investment firm manages about $2 billion. He cites strong corporate earnings, steady interest rates, relatively low unemployment and falling energy prices.

Other Wall Street veterans see less to cheer in the Dow's revival. They read it as the final chapter in the market's recovery from the last recession, signaling that another downturn looms.

Blue chip stocks, they say, are winning by default because investors are running out of other viable moneymaking alternatives.

In the short term, however, the Dow's new high may add to the stock market's momentum.

"It's a ringing of the bell for Main Street. People think, 'Maybe I should get out of my money market fund. Maybe real estate isn't the only way to go with my bonus check this year,' " said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.

But no one is predicting a return to the heady days of early 2000, when stocks ruled the investment landscape.

Although volatile technology issues led the mania of the late 1990s, the Dow was no slouch. The 30-stock index rose at an astounding rate of 25% a year from 1995 through 1999 on average, and the sky seemed the limit as the economy boomed.

Financial authors outdid one another in breathlessly forecasting how high the index might soar. The books "Dow 36,000," "Dow 40,000" and, finally, "Dow 100,000" appeared on store shelves within the span of several months in 1999.

"It was the biggest [financial] mania in the history of the world," said Bill Fleckenstein, a Seattle money manager known for his dour outlook on the stock market.

And like all such manias, it finally exhausted itself. The downturn that began in 2000 was led by technology stocks, but the rest of the market tumbled as well. The situation worsened with the recession of 2001 and a plunge in corporate earnings.

In 2002, a wave of scandals involving Enron Corp., WorldCom Inc. and other major companies was the final blow. The Dow sank 17% that year. When it hit bottom in October, the index had plummeted 38% from its peak -- its worst loss since the early 1970s.

Amid the downturn, many once-eager blue-chip investors found better things to do with their money. They fled to real estate, commodities, foreign stocks and shares of small U.S. companies.

"A lot of investors got out of blue chips. Other things competed for dollars," said Dan Pemberton, a 66-year-old retiree in Thousand Oaks.

Like millions of other small investors, Pemberton in recent years was drawn to foreign stocks. The rise of emerging economies such as China and Russia lured capital and stoked excitement about the growth potential abroad.

Huge pools of investment capital such as the California Public Employees' Retirement System also gravitated to more exotic investments, including hedge funds, which are known for fast paced trading and chasing opportunities in obscure markets.

CalPERS had 46.4% of its assets in U.S. stocks, mostly blue chips, at the end of 1999. Now that proportion is just 40%.

Meanwhile, foreign stocks have risen from 18.8% of the fund's assets in 1999 to 22.8%; real estate investments have jumped from 4.7% to 7.4%.

For individual investors, little could compete with residential real estate after 2000. Home prices soared across the nation as mortgage rates plunged to generational lows.

And after losing untold billions of dollars in the collapse of technology shares after 2000, many Americans saw real estate as much more of a sure thing than stocks.

Now, however, the housing market has cooled. Nationwide, the median price of a previously owned single-family house declined in August from a year earlier, the first such dip in 11 years.

A sharp drop in many foreign stock markets in the spring, and similar slides in oil and other commodity prices in recent months, have intensified doubts about the wisdom of risking cash in those areas.

"All of those other markets are beginning to lose their luster," said Robert Morris, director of stock investments at money manager Lord, Abbett & Co. in Jersey City, N.J.

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