HOW NOW THE DOW?

By JOHN ROTHCHILD

A great deal of fuss was made over the dow's passing 4000 points. Now that it has settled in on a plateau above that lofty summit, people are wondering what it will take to push it to 5000. Old-timers in the market can remember the Dow bumping up against 1000 for 11 years, but lately it's made a brisk ascent: 2000 in 1987, 3000 in 1991 and 4000 in 1995, gaining 1,000 points every 1,400 days. At this pace, it will reach 5000 sometime around the turn of the century.

But what are we talking about here, hiking or investing? As much as is made of the Dow's ups and downs, it's worth reminding ourselves that the Dow is not a member of an alpine club. It's an index of 30 stocks, the Dow Jones industrials, many of which aren't very industrial, unless you think of American Express as a plastics company and McDonald's as a packaging company, with the hamburgers as an afterthought. But industrial or not, they are the nation's most important equities, because 20% of all money invested in stocks goes into these 30.

Stocks don't move higher for no reason, nor do they move higher for the reasons given in the newspapers such as "the market responded positively yesterday to a cease-fire in Bosnia." But it's not happy headlines that will carry the Dow to 5000. It's numbers--particularly, the earnings. The 30 companies in the Dow earned a combined $250 per share in 1994. So with the Dow perched just above 4000, it is priced at 20 times its operating earnings. This is on the high side of what the Dow normally sells for, so there's not much hope of further advancement unless the 30 companies can figure out a way to make more money.

This is where the optimists come in. The consensus of Wall Street's battalion of educated guessers, the analysts, is that the Dow's earnings will rise to $390 in 1996. This is a rather stunning jump over the current level, so this prediction has taken a lot of people by surprise. Apparently, all this corporate slimming down, cutting the fat, getting back to basics and restructuring is paying off. Companies that make it into the Dow have reached middle age and can no longer grow as fast as they once did, so instead of wasting money in a futile attempt to live in the fast lane, they've figured out how to hunker down and accept their limitations. "They're squeezing out the profits," says Shelby Davis, manager of the New York Venture Fund.

So you've got General Motors selling off National Car Rental, and Sears divorcing itself from Allstate, attempting to maximize shareholder value. You've got 23 of the 30 Dow companies buying back their own shares--$50 billion worth in the past five years, according to Birinyi Associates. They are spending all this money for one reason: reducing the supply of stock will make the price go up. Charlie Clough, the chief investment strategist at Merrill Lynch, even thinks the fall of the dollar will help the Dow reach 5000. He sees Wall Street as a Mexico for Japanese and German investors. Already, foreign buyers have begun to scoop up U.S. assets on the cheap, hence the Zurich Insurance Group's bid for Kemper last week.

A lot of things can get in the way of a 5000 Dow: runaway inflation for one, or at the other extreme, a severe recession. But if the analysts are right, we'll get to 5000 and then some, possibly within the year. Remember you read it here first, unless, of course, the analysts are wrong, in which case it was their mistake all along.