- The Washington Times - Tuesday, April 13, 2010

The Dow Jones Industrial Average on Monday sauntered back over 11,000 for the first time since the 2008 financial crisis, culminating one of the stock market’s most dramatic rallies ever with gains of 70 percent in the past year.

The boom in stocks stands in stark contrast to the woes of 15 million unemployed workers — half of those laid off since 2007 as a result of the recession — but economists view it as a harbinger of an economic recovery that has been gaining traction this year.

To overcome the 11,000 hurdle, Dow investors had to push aside worries about the debt crisis in Greece and focus on increasing evidence of a lasting economic recovery in the United States.

News over the weekend detailing European Union plans to rescue Greece gave the market the final push it needed, sending the Dow up 8.62 points to 11,005.97 at the close of New York trading. The blue-chip Standard & Poor’s 500 index also came within a point of surpassing the 1,200 milestone marked before the crisis.

“The 11,000 level on the Dow is important,” said Jeffrey Kleintop, chief market strategist at LPL Financial, and is particularly “meaningful” to investors because that is where the Dow was before Lehman Brothers failed in September 2008, precipitating the worst of the world financial crisis and recession.

The stock market collapsed by more than half after that event, wiping out trillions of dollars of investor wealth in a destructive wave that lasted until March 2009, when stocks hit bottom.

Since that debacle, the worst since the Great Depression, spurred in part by massive government aid for banks and the economy, the market’s recovery has been unexpectedly sharp, led by a rapid return of profits to the once-teetering financial sector that had led the historic market downturn.

“The move to 11,000 is a clear sign of a well-advanced recovery in the market” and is a validating event for investors that proves the market’s recovery is real in much the same way that the first sign of new jobs earlier this month validated the economic recovery and proved it was real for unemployed workers, Mr. Kleintop said.

The market could experience a 5 percent to 10 percent pullback in coming months on signs that China and the U.S. Federal Reserve are tightening monetary policy as the recovery heats up, he said, but he nevertheless expects it to recover quickly afterward, with the Dow back over 11,000 by midyear.

Stock indexes in recent days have “broken to new highs as optimism for a robust economic recovery overrode sovereign debt concerns in the eurozone,” said Mark R. Pawlak, an analyst with Keefe, Bruyette & Woods in New York.

The newfound optimism is not only helping stocks, but is boosting a variety of other markets, from oil and commodities to the U.S. dollar and battered subprime mortgage markets, he noted. As could be expected with improvement in the economy, interest rates are on the rise, and last week the yield on Treasury’s bellwether 10-year bond topped the psychologically important 4 percent level for the first time since the crisis.

“Investors are getting a touch of spring fever” as they see “seedlings of renewed economic growth sprouting” after a “long and unusually cold economic winter,” said Edward Hadas, an analyst at Breakingviews.com.

The most promising signs include a revival of job growth in recent months and “a spring of geopolitical peace, as the United States and China moved away from a confrontation” over China’s policy of fixing its currency to the dollar to spur exports, he said.

But investors should be cautious, he said, because growth continues to depend on extraordinary infusions of cash from the Fed and Congress, much of which will be withdrawn gradually this year.

“Higher yields could once again blight the financial system — U.S. mortgages are directly linked to treasuries,” he said. “Investors could be a little too optimistic for their own good.”

Andrew Milligan, head of global strategy at Standard Life Investments, expects the market’s moderate pace of recovery to continue this year as investors look forward to new stages of recovery while stumbling from time to time on bumps caused by complicated and long-lasting government debt problems left in the aftermath of the global crisis.

While stocks are in the “early stages of a bull market,” he warns of “dangers from air pockets in the world economy.” In particular, the “complex interaction between economics and politics” could hinder the markets as countries from Greece to the United States struggle with their massive budget deficits. Markets also could be rocked by the monumental struggle between the U.S. and China, and Congress’ move toward major new regulations on Wall Street, he said.

Since the stock recovery started with the revival of Wall Street firms, any radical reforms aimed at appeasing populist political interests could “significantly” affect the profits of financial firms and their ability to provide capital to the rest of the economy, he said.

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