- The Washington Times - Tuesday, October 3, 2006

Stocks got a lift yesterday from an unexpected plunge in oil prices to below $59 a barrel, giving the Dow Jones Industrial Average the final push it needed to close at a record high of 11,727.34.

The dramatic fall in oil and gasoline prices, which are down by a dollar from their summer highs in many areas, buoyed hopes on Wall Street that the economic slowdown will be short-lived and inflation will be quelled without further damage to the economy.

The energy price collapse gives a simultaneous boost to growth and profits, and a break from inflation that is like an elixer to the market, said Richard Berner, chief U.S. economist at Morgan Stanley. “Lower headline inflation keeps interest rates down and the Federal Reserve in check, while lower gasoline prices keep the consumer afloat.”

Charles Carlson, a portfolio manager at Horizon Investment Services LLC, said the Dow’s move into uncharted territory could get people interested in investing in stocks again. Wealthy people continued to play the market after it collapsed in early 2000, but average Americans drifted away from stocks and invested in other sectors such as housing, which is now in a downturn.

“Now that you have a definitive new all-time high, the fact that it is the Dow and the most recognized index, that is the type of thing that will shine the spotlight on the market,” Mr. Carlson said.

The Dow average comprises 30 large, blue-chip companies including Wal-Mart Inc., Alcoa Inc. and Microsoft Corp. It is doing particularly well in response to signs of a soft landing in the economy, said Charmaine Buskas, analyst at Economy.com, because “late-cycle expansion is usually conducive to out-performance in big-cap” stocks.

Big-name companies and their stocks fare better during late-stage expansions because they can achieve profitability and cost-savings through global outsourcing and other efficiencies, and can take advantage of stronger growth in economies overseas. That makes it easier for them than small companies to operate in an environment of slower growth and declining inflation, which is what most economists foresee next year.

The Standard & Poor’s 500 Index is a blue-chip gauge that also has gotten a lift from recent economic news and is trading near the highest levels in six years but, unlike the Dow, at 1,134 it remains 15 percent below its record high of 1,527.

The century-old Dow was the first to exceed its previous high-water mark because it did not fall as much as the S&P; Index or the Nasdaq Composite Index between the market top in early 2000, when the technology stock bubble burst, and the market bottom in October 2002, Ms. Buskas said.

“The Dow Jones fell only 38 percent from peak to trough during the last bear market, which compares favorably to the nearly 50 percent dive in the S&P; 500 and the nearly 80 percent drop in the Nasdaq,” she said.

Since the bear market ended four years ago, the Dow has risen 61 percent, led by a near quadrupling in the share price of Caterpillar Inc., the biggest maker of earth-moving equipment. Other strong performers were Hewlett-Packard Co. and JPMorgan Chase & Co., both of whose stocks tripled in value.

This year, the Dow came within 81 points of the record in May, but then tumbled 8 percent in the next month. Shares of General Motors Corp. led the Dow’s rebound by surging 32 percent.

Leading the Dow to a record yesterday were the stocks of Wal-Mart, Boeing Co. and United Technologies Corp., maker of Otis elevators and Carrier air conditioners.

The rapid retreat in energy prices since Labor Day has been accompanied by declines in other commodity and metals prices that had been fueling inflation concerns. Gold prices have dropped below the psychologically important threshold of $600 an ounce.

Oil and gasoline prices usually fall after the peak summer driving season, but this year the decline was steeper and quicker than expected. Analysts say that is because not a single hurricane threatened U.S. oil fields in the Gulf of Mexico, despite predictions of an above-average hurricane season. Also, inventories of oil and gas at refineries are plentiful, and world supplies of oil have increased in recent months.

The big break in energy prices has spurred an uptick in optimism on Wall Street and Main Street. But Mr. Berner cautioned that “It would be unwise to count on a continued downdraft in energy. … Winter is coming and with it the likelihood of a rebound in energy quotes.”

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