Fatal Attraction: The Dow and 10,000


By Peter Coy Anyone who has ever been in a bad relationship recognizes the behavior: You know it's time to move on, but you can't help yourself. You keep going back. That's the way it's starting to feel with the Dow Jones industrial average and the psychological pull of the 10,000-point mark.

The average first broke through 10,000 back on Mar. 29, 1999, when spring was in the air and Internet bubbles were floating skyward. Since then the benchmark index of 30 stocks has crossed 10,000 from either above or below no fewer than 49 times. The next time (if there is a next time) will be an even 50. This is feeling a lot like a fatal attraction.

On Apr. 29 the Dow jumped 122 points, to 10,193, up 1.2% for the day. But most analysts agree that almost any bad news in coming days could easily send it back below the round number. One more time.

REMEMBER 1,000? Of course, it's easy to overdo the romantic-cum-psychotic take on the stock market. Prices do respond to events in the real world. Out there, the news is mixed. On the downside, the Commerce Dept. announced on Apr. 28 that the economy grew at a rate of only 3.1% in the first quarter, the slowest since the autumn of 2003. Take away the growth that came from inventory accumulating on shelves, and expansion in so-called final demand was just 1.9% annually.

What's more, the Federal Reserve keeps raising interest rates. Another quarter-point hike is expected when policymakers meet on May 3. Conversely, keeping stocks aloft, the economic expansion is continuing. In fact, profits are strong enough that the price-earnings ratio of the Standard & Poor's 500-stock index is only around 20 -- making stocks way cheaper than in early '99, when the p-e of the S&P was well over 30. With that in mind, few market-watchers are forecasting Armageddon.

Yet the question of how much longer the dark magnetism between the Dow and Ten Thou could go on is another matter. If history is any measure, this unhealthy romance could last awhile. Look back at what happened when the Dow was flirting with 1,000.

ON CICADA TIME. On Feb. 9, 1966, it hit 995.14. Investors were jubilant. The Nifty Fifty of the era's can't-miss stocks really did seem nifty. But it wasn't until more than six years later -- on Nov. 14, 1972 -- that the Dow finally managed to crack through 1,000, closing at 1,003.15.

Wait -- it gets worse. Soon after, the economy was hit by recession, oil crises, soaring interest rates, slow productivity growth, and a host of other maladies. The Dow went as low as 577.60 in December, 1974, and it didn't get above 1,000 for good until December, 1982.

To sum up, it was close to 17 years between the Dow's first near-miss at 1,000 and its last close below that figure. So far, the flirtation with 10,000 has lasted for only six years. Are we facing 11 more years of this? Egad. Granted, if the economy and the markets revive, there may never again be a four-digit Dow. At the moment, though, this fatal attraction shows no sign of ebbing. Coy is Economics editor for BusinessWeek in New York


We Almost Lost the Nasdaq
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