Dow closes at record, tops 2007 high
BY DAVID ROEDER AND FRANCINE KNOWLES Business Reporters March 5, 2013 8:22AM
Updated: April 7, 2013 6:18AM
The stock market completed a five-year comeback Tuesday, with the Dow Jones industrial average eclipsing its record close of October 2007, as investors plowed cash into their faith that the economy will improve.
It’s a faith whose main tenet is the bond-buying campaign of the Federal Reserve and its goal of keeping interest rates near zero. Any sign of a change in Fed policy, experts warned, will take the charge out of the bull market.
But for now, investors should enjoy the action while appreciating the growing risk, analysts said.
“It’s a rally that just can’t be stopped,” said Stephen Mack, president of Mack Investment Securities in Glenview, who frequently has a cautious outlook but now believes stocks will venture higher. “Zero-percent interest rates are a powerful stimulus,” he said.
The Dow’s upward march followed an historical pattern. Stocks over time have more days in which prices rise than fall, but the declines are steep and can cost years of moderate, steady gains.
The Dow’s previous record close of 14,164.53 on Oct. 9, 2007, was followed just a year and a half later by its lowest finish in 12 years, just 6,547 in March 2009. It’s taken four years, but it has more than doubled from that point.
The 30-stock benchmark finished Tuesday at 14,253.77, up 125.95 points for the day, or 0.89 percent. Its companion, the Standard & Poor’s 500, rose nearly 1 percent, 14.59 points, to 1,539.79 and remains off its record close of 1,565.15, also set Oct. 9, 2007.
The Nasdaq composite index rose 1.3 percent, 42.10 points, to 3,224.13.
The market’s 2007 top was a rare highlight in what otherwise has been called a “lost decade” for investors, especially if you factor in the tumbling stock prices after the pop of the Internet stock “bubble” in 2000.
Despite the new record, investors could still be in a wilderness of few long-term gains, said Jack Ablin, chief investment officer for BMO Private Bank in Chicago.
Ablin said equities benefit from the lack of alternatives for safely parking cash. “I think the path of least resistance is higher,” he said.
“I think given this huge valuation disparity between bonds and stocks, I think the market could go higher and I think ultimately what upsets it is probably rumblings from the Fed. If investors start to catch wind that the Fed will take its foot off the accelerator, that could scare a lot of people away from equities,” he said.
Palos Heights-based financial planner William Kovacic said the market, maintaining its function of trying to see six to mine months ahead, is betting that currently mixed economic data will improve. One factor in that outlook, he said, is that tensions in the Mideast will abate, ending what he regards as a $20-per-barrel “premium” built into oil prices. Oil closed Tuesday at $90.58 a barrel.
Kovacic said investors should avoid bonds because of the threat that inflation will revive and hurt their value. Keeping about 25 percent of assets in cash is appropriate for many people, and some should consider stocks of gold mining firms, as the price of gold has dropped about 6 percent his year.
Another measure of the market, the Chicago Board Options Exchange’s widely followed volatility measure, known as the “fear index,” is signaling not worry but complacency. Called the VIX, it stood at 19 on Feb. 25, close to its longterm average, but has since fallen to Tuesday’s close of 13.48.
“It’s a testament of how strong earnings have been with a combination of taking the blinders off the market,” said Andres Garcia-Amaya, global market strategist for JP Morgan Funds. “From a sentiment perspective going from last year into this year, all that has happened is we took the blinders off.”
While the Dow rose 7 percent last year, uncertainty hindered stocks, he said.
“We had the fiscal cliff. We had the debt ceiling discussion. We had all these things that basically could have caused a lot of damage to the economy, and didn’t get them,” Garcia-Amaya said. “We didn’t get the debt ceiling debacle. ... It has allowed the market to focus more on the earnings, and the earnings have been strong throughout really the last couple of years.”
Morningstar Inc. Markets Editor Jeremy Glaser said reports on housing have been strong, and hiring has increased. A strong rise in retail sales in Europe also helped.
“We’ve really seen some decent economic data relatively recently where people think perhaps the economy is still kind of doing pretty well, particularly in the U.S.,” said Glaser.
In the face of the runup this year, more money has gone into stocks. In January, $15.4 billion went into U.S. stock funds in January, the largest since 2004, Glaser noted. But last year $117 billion left the space, and there has been an average of $7 billion leaving the category every month for the last three-years, he said.
But a pullback could be ahead if the debt crisis in Europe comes to the forefront again, U.S. corporate earnings start to falter and if worse than expected U.S. economic data pops up, Glaser said.
“We think stocks are fully valued right now,” he added. “At this level, we don’t expect to see these kind of returns continue at these levels.
“I think there’s a good chance for some volatility in the coming months, and we could see some kind of big kind of swings up and down.”
Garcia-Amaya said short-term, “the market is due for a pause, for some consolidation because it has been in a very strong rally.”
But for investors focused long-term, he noted 10-year Treasury notes are at 1.9 percent, and cash is yielding in negative returns when adjusted for inflation, so when looking at equities, he said, “we think earnings will continue to grow, even though at a tepid pace.
“We’re coming from very low levels of optimism, so a combination of slow, but persistent earnings growth” and increased optimism “will actually allow the equity markets to continue to rally,” he said.