Confident Investors Propel Dow Above 4,000 for 1st Time : Wall Street: Index surges 30 points to close above historic ‘millennium’ mark. Rally is fueled by a belief that interest rates have peaked and economy is healthy.

The Dow Jones industrial average surged on Thursday and closed above the historic 4,000 level for the first time in a rally fueled by Wall Street’s increasing conviction that interest rates have peaked and that the economy is headed for slower--but still positive--growth.

The nation’s most widely watched stock index jumped 30.28 points to 4,003.33, the first close above a “millennium” mark since the index reached 3,004 on April 17, 1991.

The rally, the latest stage of a stock market advance that began in mid-December, followed Federal Reserve Board Chairman Alan Greenspan’s most upbeat comments to date on the central bank’s outlook for interest rates, inflation and U.S. economic growth.

In two days of congressional testimony that concluded on Thursday, Greenspan suggested that the Fed may well be finished tightening credit, after seven interest-rate hikes that have doubled short-term rates over the past 13 months, to about 6%.

Moreover, Greenspan for the first time indicated that the Fed is looking ahead to a point at which it may begin lowering rates again, to assure that the economy doesn’t fall into recession.

On Wall Street, Greenspan’s choice of words were viewed by many investors as a declaration of victory in the Fed’s effort to slow the economy to a sustainable, low-inflation growth pace--an environment widely considered to be ideal for many U.S. companies and for the stock market.

“We’re seeing a growing number of signs that the proverbial ‘soft landing’ has been achieved,” said John R. Williams, chief economist at Banker Trust New York.

“We think the stock market is going to see higher highs--at least a Dow of 4,300 this year,” said Rao Chalasani, market strategist at Kemper Securities Corp. in Chicago.

Other analysts, however, warned that the jury still is out on the economy’s trend. Some experts worry that economic growth hasn’t slowed as sharply as Greenspan may now believe, while others fear that the Fed’s 1994 interest rate hikes were so severe that they have already set the stage for a recession later this year.

“There may now be a good deal of concern on the part of the Fed governors” about a recession, said John Lonski, economist at Moodys Investors Service in New York. Greenspan’s suddenly doveish approach to interest rates could reflect that concern, Lonski said.

Yet the renewed rush into stocks on Thursday suggested that recession fears remain well in the background for most investors.

For the 30-stock Dow index, which includes such brand-name American companies as Walt Disney, AT&T;, Exxon and Eastman Kodak, closing above the 4,000 mark has no fundamental significance for the stock market as a whole.

Indeed, a broader measure of the market’s health, the Standard & Poor’s index of 500 blue-chip stocks, hit a record on Feb. 14, one day before the Dow finally topped its previous peak set more than a year ago.

But because the Dow is so familiar to the general public, the crossing of a “millennium” mark naturally garners extensive publicity and causes many investors to consider whether to add to--or subtract from--their stock holdings, analysts say.

“People take a very hard look at their portfolios at these Dow points,” said Hugh Johnson, veteran market strategist at First Albany Corp. in Albany, N.Y.

At the same time, a new Dow record naturally becomes a reflection, of sorts, of the perceived health of American business and investors’ faith in U.S. companies’ long-term growth potential.

For example, when the Dow crossed the 3,000 mark, on April 17, 1991, the U.S. economy was technically still in recession, but the United States had emerged victorious in the Gulf War and investors were looking ahead to an economic recovery.

The biggest surprise about Dow-4,000, many analysts say, is how quickly it occurred in the wake of last year’s jump in interest rates, one of the steepest in history.

After cutting rates for nearly five years to keep the mostly slow-growing economy on track, the Fed began to raise rates on Feb. 4, 1994, citing the need to rein in growth and keep inflation restrained.

The Dow, which reached a then-record 3,978.36 on Jan. 31, 1994, plunged on Feb. 4 with the Fed’s rate announcement, setting off a broad market decline that would last most of the year and become the worst setback for stocks since the bear market year of 1990.

However, the market’s path in 1994 wasn’t straight down, but rather resembled a roller-coaster ride, as stocks repeatedly rose and tumbled in response to interest rate moves.

The Dow’s low for 1994 was 3,593.35 in early April, a 9.7% decline from its peak. But many stocks lost 30% or more of their value during the course of the year, frightening large and small investors alike and raising fears of even deeper declines this year if the Fed continued to tighten credit.

“There was plenty of pain and plenty of disillusionment to go around,” said Alan Ackerman, market strategist at Fahnestock & Co. in New York.

By early December, however, the markets began to show tentative signs of bottoming. Long-term Treasury bond yields, which had rocketed with short-term interest rates last year, began to trend lower after reaching 8.15% in November.

Indeed, some Wall Streeters have viewed the bond market’s rally, which has pulled the long-term Treasury bond yield back to 7.54% currently, as the surest sign that investors expect the Fed to succeed with a soft landing for the economy.

Meanwhile, the Dow, after sliding to 3,675 in late-November, began to creep up in December, a rally that gained steam in January and which has broadened market-wide in February. At 4,003.33, the Dow is up 9% from its November low.

Analysts say that stocks have been responding to more than just the possibility that interest rates have peaked:

- Strong corporate earnings growth, a byproduct of the economy’s health, has underpinned stock prices over the past 13 months, and also allowed many companies to boost dividend payments to shareholders.

- Surprising gains in worker productivity have convinced more investors that American companies aren’t in danger of losing their “lean and mean” edge over global competitors.

- Corporate executives have been buying their own companies’ stocks at a brisk pace in recent months, a typical sign that they don’t believe stocks are overpriced relative to the outlook for earnings growth.

- Perhaps most important, small investors have become aggressive buyers of U.S. stock mutual funds again, pumping cash into the market even as higher yields on bank CDs and other, safer investments have become more competitive.

Baltimore-based mutual fund firm T. Rowe Price Associates, for example, says its stock funds have attracted a net $500 million in new cash so far this year, after a sharp drop-off in new purchases late in 1994.

In addition, as problems in Mexico and other so-called emerging markets have slashed stock values in those markets, many Americans have brought their money home after sending unprecedented amounts abroad in 1993 and 1994.

T. Rowe Price says nearly 75% of its stock-fund in-flows this year have gone to U.S. stock funds. In 1994, in contrast, 64% of the firm’s cash in-flows went to international stock funds.

Whether investors will continue to look with favor on U.S. stocks remains to be seen, however. Analysts warn that any new signs of surprising economic strength could derail hopes for a soft landing, bringing new Fed rate increases.

Worse, signs of a rapidly decelerating economy could swell concerns that the Fed has gone too far with tight credit, and that a recession could be around the corner--which would depress corporate earnings and most likely lead to a new bear market in stocks, analysts warn.

MIXED REACTION: Dow record sparked hope, nostalgia and indifference. D1