Dow Riding Bull Run Into the Record Books

WASHINGTON -- The Dow Jones industrial average ended 1996 with a gain of 26 percent for the year, an especially impressive run following the blue-chip index's 33 percent rise in 1995. Wall Street historians must revisit the era of President Dwight Eisenhower to find a better back-to-back stock market performance.

The Dow closed out the year on a sour note, nose-diving 101 points Dec. 31 to end at 6448.27 after unexpectedly strong economic data fueled inflationary fears. But the day's sell-off hardly marred the market's recent enthusiasm for itself. The last comparable two-year market surge was in 1954 and 1955, when the booming post-war Dow rose 44 percent and 29 percent.

This time, the U.S. stock market is riding its longest bull run -- the Dow entered 1997 with six straight years of share price increases behind it: a first in the blue-chip index's 100-year history. The Dow, composed of 30 large industrial companies, set 44 record highs last year alone, reaching its pinnacle of 6560.91 only five days ago. That broke the previous record of 6547.79 set Nov. 25.

While some stock touts expect a market "correction" -- a drop of at least 10 percent -- sometime soon, most of the economic conditions that caused shares to rise in the first place seem still to be present: waves of new money entering employee 401(k) retirement accounts; gently rising corporate earnings; little danger of inflation or recession; and unappealingly low rates of return from bonds and bank certificates of deposit.

"In the eyes of many in the financial markets, we had entered one of those periods that seems to be the best of all possible worlds," Ronald Talley, with the WEFA Group economic consulting firm, wrote of the situation late last year. "The economy is growing but only at a moderate pace, inflation is low and stable, and monetary policy seemed likely to be held steady."

"We should bow in thanks to [Federal Reserve Chairman] Alan Greenspan for this," said Michael Lipper, president of Lipper Analytical Services Inc., a mutual fund tracking organization. Under Greenspan's direction, the Fed kept a tight grip on interest rates without tipping into recession.

"Investors feel the principal game in town is the stock market," Lipper said. "This is one very strong market."

To be sure, the gains weren't uniform. U.S. small-company stocks returned only about 12 percent, prompting many to speculate that they'll outrun bigger companies' shares this year.

The U.S. market's overall surge induced ever-more Americans -- and Japanese, Germans and Russians, for that matter -- to pour money into mutual funds in staggering amounts in 1996. Some $33.6 billion in new money sloshed into mutual funds in November alone, on top of October's $34.5 billion, said the Investment Company Institute, an industry trade group.

Now U.S. mutual funds, including money market and bond funds, hold $3.5 trillion. It's become an industry that rivals banking for its economic clout, especially in the financial lives of millions of Americans who have staked their future on the complexities of personal portfolio management.

A key reason for the stock market's potency this year is the money employees are pumping into their 401(k) plans. They are also taking more risks than they did two years ago, according to Access Research Inc., a Connecticut firm that studies employee-benefit programs.