The Dow Jones industrial average on Tuesday surged convincingly past its previous record and landed at an all-time high of 14,253.77, fueled by record corporate profits and the loose money policies of global central banks.
In what was otherwise a seemingly normal day of light trading on the New York Stock Exchange, the venerated blue chip index extended its recent rally and jumped 126 points, while the blue chip Standard & Poor’s 500 index ended within 25 points of a record high at 1,539.79. The last time the Dow attained such lofty heights was in October 2007, two months before the onset of the Great Recession, when it set a record at 14,164.53.
The Dow has been on a tear this year despite a wobbly economy, having gained 9 percent in the past two months. It has more than doubled in value since reaching a 12-year low during the depths of the recession in March 2009. While many small investors frightened by past market collapses have missed out on much of the market’s gains by sitting out the rally, inflows into stock funds this year suggest they may have decided to join the parade on Wall Street.
In pushing the century-old Dow into record territory, investors shrugged off lingering concerns about the European debt crisis, the U.S. budget standoff in Washington, the economic slowdown in China, a triple-dip recession in Japan and a host of other worries.
That’s because, analysts say, the conditions that nurture growth in stocks have rarely been more favorable. Corporate profits and dividends are at record highs, U.S. labor costs have rarely been so tame, interest rates are scraping rock-bottom, and central banks are flooding the markets with money, among other boons cited by market gurus.
More records to fall?
“It likely will take awhile for investors to feel comfortable fully embracing equities,” said Russ Koesterich, global chief investment strategist at BlackRock. “There are significant headwinds still facing the global stock market, including political uncertainty in Europe and the ongoing Washington fiscal drama.”
Still, he expects the economy and the markets to continue their gradual but steady climb into unexplored territory this year, rewarding investors who stick with the market.
“Equities’ uphill climb will likely be slow and volatile,” he said. “Still, ultimately, I expect equities to do relatively well this year given … the global economy’s slow but positive economic growth, low inflation and reasonable valuations” for stocks.
Among the signs that small investors are rejoining the market was the record inflow of $55 billion into stock mutual funds and exchange-traded funds in January and February, according to TrimTabs Investment Research. But financial advisers say mom-and-pop investors remain cautious and are only dipping their toes back into the market, rather than jumping in wholesale.
The market’s strong rally this year in the face of weak economic growth is no mystery to some, in light of the lenient policies of the Federal Reserve, which have been aimed in part at stoking a rally in stock prices and home prices. Fed Chairman Ben S. Bernanke testified recently that the central bank is pleased with the success of its ultra-low interest rates and wide-scale bond purchases at maintaining long-term rates on mortgages and other loans at all-time lows, fostering gains in wealth for investors and homeowners.
“Duh! Interest rates are at record lows and the Fed keeps stimulating,” said Gerald Celente, an author and trend forecaster, adding that the markets may not always thrive so well at the Fed’s behest. “When rates go up, the market will go down,” he said.
Flush with profits, cash
With interest and labor costs about as low as they can go, corporations have been free to focus on pumping up profits, piling up record amounts of cash and paying out a big chunk of that in dividends to stock investors. The profits bonanza led to another solid earnings season for investors in the fourth quarter.
Despite signs that consumers are feeling some strain from higher taxes, anemic wage growth and the long-running fight in Washington, corporations and the economy overall appear to have weathered the hit of tax increases at the beginning of the year fairly well, and businesses are moving to increase spending on various investments.
Jeffrey Kleintop, chief market strategist at LPL Financial, said a divergence has emerged between businesses that are in excellent financial health and consumers who remain frazzled and beleaguered by rising taxes, high gasoline prices, political bickering and limited job opportunities.
“Weak income growth and hiring is keeping a lid on consumer spending power,” with higher payroll taxes and gas prices “adding to the drain” this year, he said. Although consumers are being nicked by the loss of some government services with the latest round of budget cuts, they could take an even bigger hit at the end of the month if the stalemate in Washington results in a full-scale government shutdown, he said.
With consumers feeling downtrodden, the stocks of retailers and other companies tied to the consumer have been drooping, while industrial stocks tied to business spending have been surging, he noted. Overall, he expects the trend to keep a lid on stock market gains this year, even with the Dow now in record territory.
Robert Reich, a secretary of labor in the Clinton administration, said the bull market for stocks has resulted in a bear market for workers, because it is drawing its strength in part from the weak wage growth of average Americans, which has averaged less than 2 percent a year since 2009.
“The stock market is basically back to where it was in 2000, while corporate earnings have doubled since then. Yet the real median wage is now 8 percent below what it was in 2000, and unemployment remains sky-high,” he said. Corporations have been investing in technology rather than workers, and the profits from big productivity gains coming out of those investments have been largely reaped by investors, he said.
Meanwhile, unemployment at 7.9 percent has zapped workers’ power to bargain for better wages, leading to the largest share in 60 years of corporate income going into profits rather than wages. That is why many Americans are puzzled or even outraged by the market’s gains this year, as its fortunes do not reflect the experiences of rank-and-file workers, Mr. Reich said.