The economy may be struggling to recover, but by one closely watched measure the fear that not long ago paralyzed the markets has lifted.
The oldest and most popular gauge of the stock market on Tuesday surged past the nominal high it last reached more than five years ago, before the financial crisis hit with full force.
In the past, such a recovery would have led to celebrations on Wall Street and spread optimism about the economy. But the gain by the Dow Jones industrial average — the stocks of 30 American corporate giants like Coca-Cola, ExxonMobil and Microsoft — was a more downbeat event.
Wall Street executives were not dismissing the rally out of hand, but after several years of turbulence they were not cracking open the Champagne either.
The strength of the stock market is not strongly reflected in the real economy. Consumer confidence is well below the level it hit during the last high in October 2007. The unemployment rate was then 4.7 percent, compared with 7.9 percent now.
As Fears Recede, Dow Industrials Hit a Milestone
by Peter Eavis
http://www.nytimes.com/2013/03/06/business/daily-stock-market-activity.html
The economy may be struggling to recover, but by one closely watched measure the fear that not long ago paralyzed the markets has lifted.
The oldest and most popular gauge of the stock market on Tuesday surged past the nominal high it last reached more than five years ago, before the financial crisis hit with full force.
In the past, such a recovery would have led to celebrations on Wall Street and spread optimism about the economy. But the gain by the Dow Jones industrial average — the stocks of 30 American corporate giants like Coca-Cola, ExxonMobil and Microsoft — was a more downbeat event.
Wall Street executives were not dismissing the rally out of hand, but after several years of turbulence they were not cracking open the Champagne either.
“The market reflects an improving economy in the U.S. and abroad,” said James P. Gorman, the chief executive of the Wall Street firm Morgan Stanley. “It helps individuals through their 401(k)’s and other investments. That being said, it has been a very fast move, and prudent investors would be well served to tread carefully and look for improving economic evidence to support any moves to higher levels.”
It has taken nearly five and half years for the Dow to get this far. Now there are concerns about whether the forces that have driven the market rally — the huge stimulus actions by the Federal Reserve and banner corporate profits — will be sufficient to push it higher.
Ordinary investors, who have largely sat on the sidelines of the market, will be asking themselves whether it is time to start investing in stocks again, given the gains that have taken place.
“What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm. “We think this could be the biggest bull market of our careers.”
The Dow broke through with a gain of 125.95 points, or 0.9 percent, closing at 14,253.77 on Tuesday. Since hitting a low in March 2009, with the panic of the financial crisis still fresh, the market measure has more than doubled.
The recovery is remarkable because the American housing market remains weak, Europe still has moments of severe instability, and fiscal battles drag on in Washington.
Using other yardsticks, however, the performance of the blue-chip Dow does not look quite as impressive.
The much broader Standard & Poor’s 500-stock index, the benchmark favored by investment professionals, was slightly below its 2007 high even after it climbed 14.59 points on Tuesday, nearly 1 percent, to 1,539.79. And when adjusted for inflation, both the Dow and the S.& P. 500 were well below their levels at the start of the last decade.
The Nasdaq composite index also surged Tuesday, rising 42.10 points, or 1.3 percent, to 3,224.13, but it remains well below its 2000 high, when it topped 5,000.
Previous highs occurred when investors believed the economy could keep growing without any extraordinary assistance. By contrast, this rally has occurred on the back of enormous monetary stimulus by the Fed and the world’s other central banks.
Since the end of 2007, five major central banks have injected some $6 trillion into the global economy, according to figures from the Bank for International Settlements. This was done to prevent bank runs and revive economies.
As the stimulus forced down interest rates, it eventually whetted investors’ appetite for riskier assets like stocks.
“Central banks do matter. Central banks have always mattered,” said David Rosenberg, chief economist at Gluskin Sheff & Associates, who started work as a Wall Street economist on the day the stock market crashed in 1987.
The looming question is what will happen when the Fed stops its stimulus. Mr. Rosenberg said that after the crisis the stock market declined sharply on two occasions when the Fed signaled that it might temper its monetary easing.
“In both cases, the Fed backtracked,” he said.
Still, the Fed’s easy money does not look like it is going to dry up soon. The stock market’s sharp move up in recent days occurred after two senior officials from the Federal Reserve, including the chairman Ben S. Bernanke, emphasized their commitment to a slack monetary policy.
The Fed has said that it will keep up the stimulus until unemployment is well below current levels. And Fed policy makers will be all the more likely to take that stance if fiscal policy acts as a brake on the economy.
The strength of the stock market is not strongly reflected in the real economy. Consumer confidence is well below the level it hit during the last high in October 2007. The unemployment rate was then 4.7 percent, compared with 7.9 percent now.
Some analysts question how much further the stock market can rise if the Fed’s actions do not lift the economy out of its sluggishness.
“I don’t think the market is going to look past several quarters of weak growth,” said Barry C. Knapp, a markets strategist with Barclays. He said the types of stocks that have done well this year are those that investors buy when economic growth is low, like health care and consumer staples.
Still, the recent rally has a strong corps of believers who have been bullish for a long time.
“I think 2013 is a year where those who’ve been really skeptical of this market have to rethink their arguments,” said Thomas Lee, the chief U.S. Equity strategist at JPMorgan Chase.
While acknowledging that much of the market’s gains have come from the Fed’s monetary policies, Mr. Lee said that corporate profits have continued to rise, and that other signs of confidence in the markets, like mergers and stock buybacks, have also rebounded.
“I think we’ll have a bull market for several more years,” he said. “It’s been a pretty healthy rally.”
Stocks can become more vulnerable to declines when their valuations climb to historical highs. But right now stocks do not look particularly pricey.
Robert J. Shiller, a professor of economics at Yale, has built a model for gauging whether stocks are cheap or expensive. Right now, stock valuations are above historical averages, but well below the stratospheric highs they have reached in bubbles, he said. According to his model, stocks are signaling that they can return about 3 to 4 percent a year.
“That’s not horrible,” he said, though he was quick to add that the stock market had a mind of its own.
The stock market’s volatility has scared retail investors for several years. A total of $556 billion has been taken out of mutual funds focused on American stocks since October 2007, according to the Investment Company Institute. That is an enormous pot of money that largely missed out on the market’s recovery.
But recent figures show a sudden change of mind among retail investors. In January, some $32 billion in net investments flowed into mutual and exchange-traded funds that focus on American stocks, according to TrimTabs Investment Research, one of the highest one-month figures in the data company’s records.
Mr. Gorman of Morgan Stanley said, “I would hope retail investors don’t pile into the market at this point, but step in cautiously.”
In the bond market, interest rates edged higher, although they remain historically low. The price of the Treasury’s 10-year note slipped 5/32, to 100 30/32, while its yield rose to 1.90 percent from 1.88 percent late Monday.