New York - Dow Over 12,000 As Remarkable Bull Market Rolls On
New York - Two years ago, the stock market was roadkill along the financial highway. Now one of the greatest bull markets in history is rolling along — maybe enough to finally get the attention of average investors.
The Dow Jones industrial average closed above 12,000 for the first time in two and a half years Tuesday, putting the Great Recession even farther in the rearview mirror and erasing most of the damage it inflicted on tens of millions of retirement accounts.
A broader measure of the stock market, the Standard & Poor’s 500 index, closed above 1,300 for the first time since Aug. 28, 2008. And at least one widely watched measure suggests stocks are still cheap by historical standards.
The remarkable run for stocks began on March 9, 2009. The Dow stood at 6,547, its lowest point in 12 years. Since then, in the fastest climb since the Great Depression, it has risen 84 percent thanks to surging corporate profits, the unexpected resilience of personal spending and a bond-buying intervention by the Federal Reserve that made stocks more appealing. And some of the early gains came because investors realized that stocks had fallen too far during the financial crisis.
The Dow’s total return, which assumes stock dividends were reinvested, is 92 percent. Anyone who bought an S&P 500 index fund that day in March 2009 has doubled his money, assuming dividends were reinvested.
The Dow closed at 12,040.16 on Tuesday, advancing 148 points after strong corporate earnings reports and signs that the manufacturing sector had a good month in January. The S&P 500 closed at 1,307.59, up 21 points.
The rebound could bring small investors back to the stock market. They have pulled nearly $245 billion out of U.S. stock mutual funds since June 2008, the last time the Dow was at 12,000, according to the Investment Company Institute. Earlier in the decade, they typically put in $145 billion a year.
And if Americans believe in the stock market again, it could accelerate the economic recovery.
“The lack of confidence has acted as a sedative across the economy,” says David Kelly, chief market strategist at J.P. Morgan Funds. “The Dow at 12,000 could boost the psychology of the American investor and be a more powerful stimulant than anything else in driving the next stage of this bull market.” Investors who see their stock portfolios rising will be more likely to spend money and take risks that could boost the economy, he says.
The market has been rising without much buying by small investors. It’s the professionals who have pushed stock prices higher for two years because they expected corporate profits to rise.
Businesses have been sitting on an enormous pile of cash — the biggest as a share of their total assets since 1959. They are starting to spend a little, upgrading their computer systems and buying basic materials in order to expand — even if they have yet to hire again in great numbers. Alcoa, the giant aluminum company, has benefited from this spending, and its stock has jumped 30 percent over the last three months. Technology stocks have led the latest push in the rally. Hewlett-Packard and IBM have each jumped by more than 10 percent over the past month.
“We are at a new stage in the economy,” says Liz Ann Sonders, chief market strategist at Charles Schwab. “There is a tremendous amount of pent-up demand for business capital spending.”
Stocks that typically do well in the first part of a bull market have been lagging the broad market recently. Small company stocks, which typically lead, have stalled after rising 27 percent last year. So-called consumer discretionary stocks — hotels, restaurants, and fashion stores that rely on people spending — tend to perform well at the start of a bull market because they tend to fall the most during downturns. Lately, they have been lagging. Consumer discretionary stocks have risen 0.5 percent this year, well behind the 4 percent gain in the S&P 500.
The stock market’s gains haven’t been matched elsewhere. Real estate prices in some cities are still near the lows they hit at the worst of the financial crisis. Economists expect that this year could bring record foreclosures. Some state and local governments are struggling to provide basic services, and the federal deficit is at its highest level as a percentage of GDP since the end of World War II.
And the unrest in Egypt shows that the market is still vulnerable to unforeseen events. The Dow fell 1.4 percent Friday, its largest drop in more than two months, because of concerns that the protests in Egypt could disrupt the global oil business. Egypt controls the Suez Canal, a vital route for oil tankers and cargo ships.
But the economy is in better shape now than it was the last time the Dow closed above 12,000, on June 19, 2008. That turned out to be just a third of the way through the Great Recession. The Dow had tumbled about 2,000 points from its all-time high of 14,164 in October 2007 but had much further to fall. Unemployment stood at 5.6 percent and was on its way to 10.1 percent.
Now the economy is expanding again. But jobs remain scarce, and the unemployment rate is 9.4 percent. Millions are unable to afford to invest in a stock rally passing them by.
The lack of demand from small investors is making stocks cheap by historical standards. The Dow now trades at 14.7 times the combined earnings per share for the past year of the 30 stocks that make up the Dow, well below the historical average of 17. If the Dow traded at 17 times earnings now, it would be at 13,877 — only 287 points below its record high.
The Dow is 15 percent below its record from October 2007 and could reach a new high this year. Pulling that off would require a total gain for 2011 of about 22 percent. The Dow has risen that much or more in a year eight times since 1985, or roughly once every three years.
Small investors are starting to buy stocks again. Investors moved $2.5 billion into mutual funds that held American companies over the first three weeks in January, the largest increase since April of last year.
Large brokerage houses that manage investments are starting to see the return of individual investors. “Our clients are showing increased confidence in the economic recovery,” says Morgan Stanley’s chief financial officer, Ruth Porat.
If unemployment starts dropping steadily, the bull market probably has further to go. Before the 2008 financial crisis, the last time unemployment was at 9.4 percent was July 1983. By November 1985, it was at 7 percent, and the Dow stood 23 percent higher.
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