The Day Ahead: The Dow's becoming an endangered species

Could this be the beginning of the end for the Dow?
Written by Larry Barrett, Contributor

Now that the Nasdaq composite has blown right past the 5,000-point mark, it's time to start taking bets on how soon it will supplant the Dow as the world's leading securities market. Does the spring of 2003 sound too soon?

Before you laugh it off, let's take a look at the numbers.

After closing at 2,393 on 9 March 1999, the tech-laden index has soared up 111 percent to Thursday's record close of 5,047. In this same time period, the Dow's made only a fractional gain. It closed at 9,694 on 9 March 1999 before ending at 10,010 on Thursday.

Even if we use the Dow's all-time high as the benchmark, it's clear the Dow will be looking over its shoulder with each passing week. On 14 January, the Dow peaked at 11,723, a nice 21 percent gain from 9 March 1999, but all of those gains have been erased in the past two months.

If we were to assume the Nasdaq composite was only to grow half as fast as it has in the past year, it would settle in at around 7,750 points a year from today. And if it maintained that same 55 percent clip, admittedly a breakneck pace, it would be at 12,012 by March 2002.

In this same period, let's assume the Dow continues to grow at the 21 percent rate it enjoyed until 14 January. If it tacked on another 21 percent a year in the next two years from that all-time high of 11,723, it would finish at around 14,185 by March 2001 and 17,164 by March 2002. Three years hence, at these same growth rates, the Dow would be trading at about 20,800 while the Nasdaq would be breathing down its neck at 18,600.

Of course, no-one expects either index to grow at those rates. It's seems impossible. But remember the Nasdaq eclipsed the 1,000-point mark for the first time in mid-1995. The Dow was trading at around 4,500 in this same period.

Can we be so arrogant as to assume companies around the globe will be unable to top the feats of today's economic powers? With record highs being set and broken, and then reset again every month, it's hard not to believe in the market's prowess. "This is par for the course,'' said Arnold Berman, technology strategist at SoundView Technology Group, about Thursday's Nasdaq rally. "It's been happening a lot and 5,000 is interesting to talk about. But we'll have to see if it's important as a milestone -- or more important than 3,000 or 4,000."

Trading volume was moderate, compared to levels seen over the last week. Since the Nasdaq broke the two billion-share volume barrier, the market has rarely seen a day of the less than two billion shares changing hands. On Thursday, only 1.9 billion shares change hands.

Three years from now, hypothetically assuming the Dow and Nasdaq maintain the pace they've established in the past year, the Nasdaq could easily be the most important market in the world. While we all know both indices will see their share of corrections and booms, the Nasdaq seems much more likely to bounce back from the downturns and capitalise on the rallies. It is chalked full of innovative companies locked in fierce competition for leadership positions at the dawn of the digital age.

The Dow, on the other hand, has many important companies of its own that generate billions, if not trillions, of dollars in sales and profits, but I don't see the same potential. Judging from the past year of unprecedented trading, investors aren't seeing it either.

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