- The Washington Times - Thursday, October 15, 2009

The Dow Jones Industrial Average on Wednesday surged through 10,000, passing another milestone in its stunning recovery from collapse early this year.

The Dow and other major stock indexes have gained more than 50 percent since hitting bottom March 9, propelled by signs that the worst of the financial crisis and deep recession are over, and that an economic revival is about to begin.

Despite the celebrations on Wall Street on Wednesday, analysts said the rally may have gone too far too fast and is already showing signs of running out of steam. Most likely, the market is due for a breather, if only because the economy has not shown that it has returned to full health.

“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,” said Don Ross, a global strategist at Titanium Asset Management.

AP INTERACTIVE: Click here to see a history of the Dow Jones Industrial Average.

An unemployment rate near 10 percent, 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 homebuyers, economists say.

A report from the Commerce Department on Wednesday showing a 1.5 percent drop in retail sales after the clunkers program ended was a reminder that consumers who have experienced the loss of nearly 8 million jobs since December 2007 remain wary, leaving the economy weak and vulnerable to setbacks.

Still, stocks powered ahead, showing confidence among investors that the ample stimulus put into place by Congress and the Federal Reserve ultimately will steer the economy into a lasting recovery.

Like the traders cheering on the floor of the New York Stock Exchange on Wednesday afternoon, Mr. Ross said he was awed by the market’s gains.

“What a rally,” he said, noting that the record-breaking stock surge has retraced nearly half of the market’s losses and is on track to provide investors with nearly a 20 percent return this year.

The last time the century-old index passed 10,000 was a year ago, when markets around the world were crashing and the Dow was headed on a journey to a 12-year low of 6,547. The first time was in March 1999, during the technology-stock boom. It has passed through the 10,000 mark more than 50 times since then.

While the market has staged a spectacular recovery since the spring, the Dow remains 29 percent below its record high of more than 14,000, reached in October 2007 just before the economy sank into recession.

The Dow’s 145-point rise to 10,016 on Wednesday was sparked by solid earnings reports from two blue-chip titans: Intel Corp. and JPMorgan Chase & Co. Recent earnings reports show that while companies have had a difficult time growing revenues in a recessionary economy, they have been adept at squeezing out profits by cutting costs - often by cutting jobs.

Even crisis-stricken banks such as JPMorgan have managed to post stellar earnings, often owing to the revival of trading in stocks and other markets since March - a lucrative business for Wall Street banks. That has enabled the finance sector to lead the market foward after a near-death experience this winter, when banks were forced to take cash from the federal government to stay afloat.

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

The central bank has repeatedly 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 fell to a 14-month low against the euro Wednesday. That translates into higher earnings for the many U.S. corporations that sell or conduct business overseas because 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, both at home and in major emerging markets such 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 tail wind of extraordinary market support provided by the Fed could turn into a head wind 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.

Barry Cliff, president of AFC Asset Management Services, said he thinks the economy is in worse shape than many investors realize. He expects the stock market to give up about 10 percent of its gains in coming months once investors understand the serious lingering problems of overburdened and out-of-work consumers, crumbling banks, a looming commercial real estate crisis, and a persistent housing market slump.

Mr. Cliff compared these monumental problems to those of earlier eras such as the Great Depression, when it took years of struggle with many setbacks for the markets and economy to recover.

“We have not resolved the issues that precipitated the recent decline, and the worst may be yet to come,” he said.

Tyson Wright, a trader at Custom House, a Canadian investment firm, said the quick reversal of a pullback in the stock market early this month showed that the stock rally still has legs and is being fed by investors pouring into the market after sitting on the sidelines for much of the rally.

“We still have not seen the dreaded retracement in equities that many have been predicting,” he said. “There are still pools of capital left to invest, and so far any dips have been used as buying opportunities.

“At these levels, the market is still modestly bullish,” Mr. Wright said. “It feels like we will need to see another push higher in stocks before the buying pressure subsides.”

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