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. Last Updated: 07/27/2016

Bullish Dow Raises Old Worries

WASHINGTON -- "The Waltons" was the year's popular television show. President Richard Nixon had just won re-election. Nike was a new company. And Bill Gates was a teenager.

That day in mid-November 1972 when the Dow Jones industrial average climbed to a dizzying new height, finishing above the 1000 mark for the first time, the bedrock stocks in the widely watched 30-stock barometer were such companies as asbestos maker Johns Manville, copper company Anaconda, U.S. Steel and Woolworth's. The Dow average crossed the historic threshold that day on a trading volume of 20.2 million shares.

Times have changed. Now 20 million shares usually change hands in the first six minutes of trading. Half of the companies that made up the 1972 Dow average have been replaced by the new engines of the U.S. economy - firms such as McDonald's, Coca-Cola, Disney, Citigroup and IBM.

Companies like these - and timely rate cuts from the Federal Reserve - have helped the United States defy predictions that the world economic slowdown would hurt U.S. growth. Amid global weakness, the Dow index has become more than a barometer of corporate health; it has become a barometer of investor confidence in Corporate America.

Meanwhile, the percentage of the U.S. population that directly or indirectly owns stock has grown as baby boomers try to accumulate the resources they need for retirement.

"It's like the difference between a horse-and-buggy and a supercharger era," said Larry Wachtel, market analyst for Prudential Securities, who was a commentator when the Dow broke through the 1000 mark. "The participation of the public has heightened, the demographics of society have changed, and more people are thinking about retirement," he said.

Analysts worry, however, that there may be one similarity between the two eras: The possibility that the Dow average - made up of just 30 companies - is a misleading rather than leading indicator for the economy. In 1972 the index failed to reflect inflation concerns that had prodded Nixon to impose wage and price controls. American industry was falling behind foreign competitors. And the oil crisis was just around the corner, a shock to the U.S. economy that would bring a lethal combination of stagnant growth and high inflation.

Many analysts worry the market might repeat the earlier price pattern. About two months after the first closing over 1000, the Dow slipped back; it wasn't until 1982 that it passed 1000 and stayed there. Then, as now, a small number of go-go companies pushed the average up, while most stocks lagged - something most analysts see as a danger signal for market leaders.

This time, anxiety about reaching a new price threshold isn't rooted in doubts about the strength of the fundamental U.S. economy.

Instead, anxiety about current price levels stems from concerns about whether stock prices have run too far ahead of corporate profits and performance. Whereas companies in the Dow at the end of 1972 sold for 15.2 times earnings, the Dow Jones average Monday closed at 25.45 times earnings. The dividends paid by the 30 companies in the Dow represented a yield of just 1.58 percent Monday, compared with 3.16 percent at the end of 1972.

Stephen Ross, professor of finance and economics at the MIT Sloan School of Management, said the 10,000 milestone "is no different from 9998 or 10,020, but it's an appropriate time to reflect."

He warned that investor enthusiasm now "reminds me of my Japanese friends years ago who used to tell me I didn't understand economics. Well, I do, and markets go down as well as up."

Japan's stock market, which also sold at towering premiums to corporate earnings, has been battered by the country's economic slowdown. The Japanese market is selling at roughly 40 percent of its 1989 peak.

Of the Dow's blistering double-digit increases for four years, Ross said: "It just is not possible to increase 20 percent a year for the next hundred years. People are losing sight of that. They talk about risk and return, but it doesn't mean that if you take the risk you definitely get the return.

"The simple reality is that trees don't grow to the sky. There comes a time when someone looks down from the sky and decides to trim the tree."