A Love Affair With Stocks

NEW YORK -- The Dow Jones industrial average closed for the first time over the 5,000 mark, a testament to America's current love affair with the stock market.

The surge in stock prices this year, which caught many experts on Wall Street by surprise, has resulted from a powerful mix of falling interest rates, strong corporate earnings and a tidal wave of cash into mutual funds and retirement plans.

The Dow industrial average, which gained 40.46 points Tuesday to close at 5023.55, has climbed 1,000 points since Feb. 23. Broader stock market measures such as the Standard & Poor's 500 and the Nasdaq composite index, which tracks small and high-technology companies, also are near their historic highs.

The stock market's dizzying rise this year has created more financial wealth for Americans than in any previous year, according to Ibbotson Associates, a research firm in Chicago that tracks the markets. The total value of the shares traded on the three major U.S. stock exchanges increased by $1.5 trillion through Oct. 31, according to data from the exchanges.

This year $80 billion of new cash has flowed into U.S. stock mutual funds, according to the Investment Company Institute, the mutual fund industry's research and lobbying arm.

"Personally, Dow 5,000 means my investments are looking pretty good," said Fairfax City, Virginia, resident Jerald Casey, a retired businessman. "I wasn't sure I was ever going to see it in my lifetime."

Other Americans may not yet fully realize their good fortune, analysts said. "This is the biggest annual move ever in terms of absolute gains," said Edward Yardeni, chief strategist for Deutsche Morgan Grenfell/C.J. Lawrence Inc. "Many people have their holdings in pension accounts, however, so they may not immediately understand how well they have done."

Many Wall Street professionals view Dow 5,000 as evidence that stock prices, which have been rallying since August 1982, are headed still higher.

"It confirms our long-term love affair with stocks," said Morgan Stanley & Co. stock strategist Thomas McManus. "Stocks seem to be the asset of choice."

"There is some excess in parts of the market, technology in particular," said Paul Isaac, a private investor in New York City. "But overall it does not feel like a truly wild and crazy time. I do not see anything that will kick the struts out of this market."

Byron Wien, Morgan Stanley's chief U.S. stock strategist, agrees and is recommending that his firm's clients with a stock orientation put 98 percent of their money in the market and keep only 2 percent in cash.

Even analysts who have been bearish this year are rethinking their pessimism. "I've been bearish and wrong," said David Shulman, Salomon Brothers Inc.'s chief stock market strategist. "Dow 5,000 is a validation of the bull market. I am rethinking everything as we head into 1996."

The experts on Wall Street, with a few exceptions, expected a lackluster stock market this year, with perhaps some life toward the end.

So common was this tepid view that Morgan Stanley's Wien wrote in January that one of the top 10 surprises in 1995 would be the Dow cracking 4,500.

What did the gurus miss?

"The magical combination of falling interest rates and strong corporate earnings," said Morgan Stanley's McManus. "Having both pulling in the same direction has been wonderful."

Yardeni of C.J. Lawrence places more emphasis on corporate profits than interest rates.