- The Washington Times - Wednesday, October 14, 2009

UPDATED:

The Dow Jones Industrial Average on Wednesday closed above 10,000 for the first time in a year, passing another milestone in its stunning recovery from collapse early this year.

In preliminary numbers, the Dow was up 144.80, or 1.5 percent, to close at 10,015.86.

The Dow and other major stock indexes have gained nearly 60 percent since hitting bottom on March 9, inspired by signs that the worst of the financial crisis and deep recession is over and that recovery is about to begin.

“What a rally,” said Don Ross, global strategist at Titanium Asset Management, noting that the record-breaking stock surge has retraced nearly half the market’s losses and is on track to provide investors with a nearly 20 percent return this year.

But while earnings reports show that companies have been adept at cutting costs and squeezing out profits even in the face of the deepest downturn since World War II, Mr. Ross said the rally may be running out of gas and most likely will take a breather soon.

“There’s general agreement that at least a minor setback is quite overdue, given the tremendous and uninterrupted advance of the last seven months in a row, including strong gains in the dreaded September,” he said.

The last time the century-old index passed through 10,000 was last October, when markets around the world were crashing and the Dow was headed on its historic journey down to a 12-year low near 6,000.

While the market has staged a spectacular recovery since then, the Dow remains considerably below its record high over 14,000, reached two years ago in October 2007, just before the economy sank into recession.

What happens ahead depends on how the economy performs. Many economists say investors may be disappointed if they are expecting a strong recovery like the robust revivals seen after previous steep recessions in the United States.

High unemployment, the shaky condition of banks and the battered finances of consumers who fuel 70 percent of economic activity make it likely this recovery will be tepid after an initial spurt of activity this summer generated by the “Cash for Clunkers” auto trade-in program and a tax credit for first-time home buyers, economists say.

Jeffrey Kleintop, chief market strategist at LPL Financial, remains optimistic about the prospect for stocks. He said this year’s spectacular rally has been fed by the lenient lending policies of the Federal Reserve.

The central bank repeatedly has promised to keep short-term interest rates close to zero for “an extended period” of a year or more, enabling investors to borrow and leverage their stock investments many times over. This has provided powerful fuel for the rally.

Further aiding stocks is the decline of the U.S. dollar, which translates into higher earnings for the many corporations that sell or conduct business overseas. The profits they earn in Europe and other regions with strong currencies are magnified when they are brought back home and converted into dollars.

For that reason, Mr. Kleintop has been recommending that investors take advantage of low U.S. interest rates to borrow and invest in high-performing stock markets, not only at home but in such major emerging markets abroad as China and Brazil.

Mr. Kleintop expects the Fed to continue to nurture a favorable environment for stocks, but he said the Fed could be forced to raise rates earlier than expected if the dollar’s decline turns into a rout.

“This would be cause for concern,” he said. “While we are excited by the prospects for a renewed rally in the stock market, we are vigilant for signs that the tailwind of extraordinary market support provided by the Fed could turn into a headwind with negative consequences for investors.”

“If the dollar’s weakness becomes driven by a loss of confidence by foreign investors, the Fed would likely pursue earlier and more aggressive rate hikes, posing real challenges for the economy and markets,” Mr. Kleintop said.

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