Dow Jones Index Hits a New High, Retracing Losses



Dow Jones Index Hits a New High, Retracing Losses

By VIKAS BAJAJ

The best-known measure of the stock market, the Dow Jones industrial average of 30 major stocks, rose 0.49 percent yesterday to squeak past a closing high that was set in January 2000 amid a technology-driven market boom.

In contrast to those heady days, though, investors and market professionals are greeting the current rally with more relief than euphoria, noting that the broader stock market has yet to find its way back to previous highs.

“I am happy that it has now happened so that we can move onto something else,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Stocks have been climbing without fanfare since late in July, bolstered by a decline in energy prices and by mounting signs that the Federal Reserve will not raise interest rates again this year.

The spark for yesterday’s gains was a 4 percent drop in oil prices that pushed the next-month futures price of crude oil below $60 a barrel for the first time since March.

In 2000 and the years leading up to it, the rally was fueled by demand for computers and telecommunications and a belief that the Internet would transform business. The rally over the last few months has had more modest roots: signs that the economy is moderating and inflation is tame. Investors have been encouraged that falling crude oil and gasoline prices, while a sign of slowing demand, will restrain inflation and spur consumer spending. And investors have been heartened by what they hope is a gradual and orderly end of a five-year boom in home sales and construction.

Indeed, many on Wall Street argue that the housing pullback and the decline in energy prices has put the economy in a sweet spot: not growing fast enough to accelerate inflation, but not so slowly that it risks falling into recession.

“There is and will continue to be a building sense of a Goldilocks” market, said James W. Paulsen, chief investment strategist at Wells Capital Management.

Charles P. Mayer of Pioneer Investments, a mutual fund company, added that corporate profits were still growing at robust rates, further supporting stock prices.

Still, a significant number of skeptics say that this view does not fully take into account the risks that falling home prices and sales could crimp consumer spending and cause an economic slump next year. These people note that the Dow’s new high is hollow, given that broader gauges of the market have still not returned to their high-water marks.

There is also the reality that the Dow is a measure by dollar value of only 30 blue-chip companies, and so is not representative of the great majority of traded stocks.

Jane L. Caron, chief economic strategy at Dwight Asset Management, a Vermont specialist in bond investing, took a measured view. “There is a lot of concern that the housing market softening will spill over to the rest of the economy,” she said. “But if you look at the stock markets, they seem to think that everything is O.K.”

“Somebody is wrong,” she added.

The Dow industrials closed up 56.99 points yesterday, at 11,727.34, surpassing the record of 11,722.98 set on Jan. 14, 2000 — a day when stocks were buoyed by a strong profit report from Intel and by comments from Alan Greenspan, then the Federal Reserve chairman, that interest rates would rise only slightly.

Most other market measures were also higher yesterday. The broad-based Standard & Poor’s 500-stock index rose 0.21 percent, and the technology-focused Nasdaq composite index rose 0.27 percent. The Russell 2000 index of smaller-capitalization companies was fractionally lower.

Unlike the Dow, the S.& P. 500 index is still about 12 percent away from its record high in March 2000. The majority of those stocks have returned to their 2000 levels, but a large minority — including technology stars like Cisco Systems, Sun Microsystems and JDS Uniphase — are trading at a fraction of their prices six years ago. The Nasdaq composite index is still down about 55 percent from its March 2000 peak.

Seen another way, the stock market has spent the last six years exorcising the effects of the technology bubble, Howard Silverblatt, Standard & Poor’s senior index analyst, said. He noted that without the technology sector, the S.& P. 500 would be up 17 percent today. Though not a spectacular return for six years, it would be a far better outcome for investors than a 12 percent decline.

And by some measures, the Dow still has some way to go before it can be said to have reclaimed its previous heights. On an inflation-adjusted basis, the average would have to reach a level of 14,104.97 for it to match its January 2000 peak.

Only 10 of the 30 stocks in the Dow today are at or above their levels when the index last reached its high. Most of the highfliers from the late 1990’s and early 2000, including Microsoft, I.B.M. and Intel, are a long way from the lofty levels they were trading at then. Even companies like Home Depot, Alcoa and Merck are down more than 30 percent.

“This has been a really rotten five-year period,” said James K. Glassman, a fellow at the conservative-leaning American Enterprise Institute and an author of the 1999 book “Dow 36,000.”

“It really has, there is no doubt about it,” said Mr. Glassman, who maintains that his book was mischaracterized at the time as a forecast for the market. He argues that the fear of terrorism has held down stock prices.

Still, the Dow components that have led the charge back have done exceedingly well. The price of Altria, parent company of Philip Morris, fell to a five-year low early in 2000 because of its multibillion-dollar legal liabilities, but it has more than tripled since. The shares of Caterpillar, United Technologies and Boeing have soared because of strong global demand for their heavy industrial products. Exxon Mobil, the world’s largest publicly traded oil company, is up almost 60 percent on the rise in energy prices.

The last time the Dow inched close to the record, early in May, stocks tumbled from India to New York as investors worried that the Federal Reserve, in its eagerness to curb inflation, would raise rates so much that it would push the American economy into recession and precipitate the end of an era of relatively cheap financing worldwide. The Dow industrials fell more than 8 percent and the Nasdaq composite by 11 percent at the start of the summer.

A few months have made a lot of difference. The Fed left its benchmark short-term rate unchanged at 5.25 percent in its last two meetings, on the rationale that a slowing economy and its two-year campaign to raise rates might be enough to lower prices. Indeed, inflation has slowed and data for September is widely expected to show a further drop because of the recent fall in energy prices. Nationally, average retail gasoline prices are at $2.36 a gallon this week, compared with just over $3 at the start of August.

Declining home sales and construction activity has helped slow the economy without causing any major retrenchment, at least so far. The economy grew at a 2.6 percent annual pace in the second quarter after a 5.6 percent increase in the first three months of the year.

Bond investors remain somewhat more skeptical than stock buyers. The yields on long-term Treasury bonds, for instance, indicate that investors are assuming that the Fed will have to reverse course soon and cut interest rates to resuscitate the economy.

The yield on the benchmark 10-year Treasury note, which moves in the opposite direction from the price, has fallen to 4.61 percent, from 5.25 percent late in June. Investors demand higher yields when they are worried that inflation will eat deeper into the value of their holdings, and they push yields down when they think that interest rates are headed lower or when they are seeking shelter from tougher times.

Market historians have noted that stocks can take a long time to recover from periods of great excess. The Dow and the S.&. P., for instance, did not return to their 1929 pre-crash peaks until 1954, long after the Depression and World War II ended.

All this does not mean that investors have stood still in the last six years. Many foreign stock markets, especially those in developing countries, have outperformed American markets, as have commodities like oil, gold and copper. In the United States, the stocks of smaller companies have outrun larger ones, though that trend appears to have reversed this summer.

Data on investment fund flows show that Americans have invested more in those faster-growing areas. They have also spent increasingly more on home purchases and improvements, as evidenced by the large run-up in housing sales and prices and the sharp increases in mortgage and home equity lending.

Will the Dow’s new record prompt skeptical investors to reconsider stocks, perhaps giving them a psychological boost? Momentum can help propel stock markets, but investors could also conclude that the Dow’s return to its early 2000 level means that the index has merely been treading water for six years.

“You’re telling me that I have gone six and a half years and gone even,” Mr. Silverblatt of S.& P. said. “What about the 19 percent inflation? Well, it’s better than being down, but it’s not as positive as you think.”

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