| USA TODAY | - |
NEW
YORK -- When it comes to big, round numbers with major investment
significance, 14,000 is as big as it gets for the Dow Jones industrial
average.
Dow at 14,010: Market peak or new leg up?
NEW
YORK -- When it comes to big, round numbers with major investment
significance, 14,000 is as big as it gets for the Dow Jones industrial
average.
Indeed, Dow 14,000 is back in play and in the headlines after the iconic 117-year-old blue chip index topped that lofty milestone Friday for the first time since October 2007.
The move pushed the world's best-known stock gauge up 149.21 points to close at 14,009.79, for its best level since the 2008 financial crisis. The benchmark index is not far from its Oct. 9, 2007, all-time high of 14,164.53 and the move is prompting talk of a new peak, and even Dow 15,000.
The Dow is now up 6.9% in 2013 and has rallied 114% since the bear market low in March 2009.
STOCKS FRIDAY: Jobs report ignites rally
The Dow's heady rush to levels not seen in more than five years, and potentially to heights it has never seen before, has elicited feelings of renewed hope and cautious optimism on Wall Street.
The sense of optimism comes from the fact that the Dow's rise is reflecting a growing belief that economies, both in the U.S. and around the world, are in a better place and on the road to recovery. Any signs of a sustainable economic recovery will also prove bullish for corporate profitability at a time when U.S. companies in the Standard & Poor's 500 stock index are already on track to post record earnings-per-share of $103.40 in 2012.
"This is just the beginning," says Jeremy Siegel, a finance professor at the Wharton School of Business at the University of Pennsylvania. He sees the Dow hitting 15,000 or even higher by the end of the year. "I think this is going to be a 20%-plus year for stocks."
Siegel says with cash yielding 0% and 10-year U.S. Treasury notes paying roughly 2% in interest, investors have little alternative other than to buy stocks in search of bigger gains. "Where else are they going to go for returns," says Siegel.
Main Street investors now have $2.4 trillion parked in money market funds, $6.7 trillion in bank savings accounts and $633 billion in low-yielding certificates of deposit, according to Peter Crane, publisher of Money Fund Intelligence, citing Federal Reserve data.
The lingering skepticism on the part of some investors comes from the knowledge that Dow 14,000 is an area where the stock market topped out in 2007 and a level that has acted more like a ceiling for stock prices, rather than a floor.
In fact, the Dow only closed above 14,000 on nine trading days in 2007, including its first-ever close above that psychologically important number on July 19, 2007.
It is not an overstatement to say that Dow 14,000 is the biggest round number the Dow has ever had to hurdle in its long history.
"Rarified territory is a good way to describe it," says Jamie Farmer, managing director at S&P Dow Jones Indices.
And the thinner the air, the tougher the slog.
"We are back to levels where the market has had trouble sustaining highs in the past," says Richard Moroney, editor of Dow Theory Forecasts newsletter.
While the Dow has a good shot at hitting a new high in 2013, it's more likely it will stop going straight up soon and settle into a range that will keep it trading around 14,000 for most of the year, cautions Jeff Kleintop, chief market strategist at LPL Financial. He notes that the blue-chip gauge got off to a rip-roaring start last year and quickly climbed to 13,000 before stalling and not breaking out for good until December.
"Whenever we get to these big milestones," says Kleintop, "it seems to take the market a better part of a year to digest those gains."
A further massive run-up for the Dow right now seems unlikely because the market still will have to confront falling earnings estimates later in 2013 and more turbulence in Europe ahead of key German elections in the fall, Kleintop says. Wall Street analysts expect double-digit earnings growth in the final two quarters of this year, according to Thomson Reuters. But Kleintop says those lofty estimates will have to come down due to a still-weak global economy. Fourth-quarter 2012 earnings are estimated go grow 3.8%, Thomson Reuters says. And 68% of the nearly half of companies in the S&P 500 that have reported have topped forecasts, which is better than the 62% long-term average.
Frank Fantozzi, president and CEO of Planned Financial Services, an independent wealth management firm, is also preaching caution to his high-net-worth clients. "We're being very cautious now," he says, adding that he expects virtually zero economic growth in the first three months of 2013 as the nation adjusts to higher taxes and less government spending.
"If we get zero GDP growth in the January through March quarter, there is no way the Dow will be still at 14,000," says Fantozzi. He says he wouldn't be surprised if the Dow suffered a 3% to 5% price correction.
He also doesn't believe the early signs in 2013 of Main Street investors putting their money back into the stock market will prove long-lasting. Individual investors poured $16.1 billion into U.S.-stock mutual funds in the three weeks ended Jan. 23, according to the Investment Company Institute, the mutual fund industry trade group.
But Fantozzi's view is that this is more of a sign of investors who fled the market late in 2012 amid "fiscal cliff"-related fears returning to stocks, debunking the bull-driven theory of a flood of new money entering the market.
"It's people buying back in after getting out last quarter," he says. More than $9 billion exited domestic stock mutual funds in the week ended Jan. 2.
But records are meant to be broken, and there are reasons why the Dow has been rising and a case to be made that the rally has room to run, and a new record high is within reach.
The Dow's move up, Farmer says, has been driven by a growing belief that headwinds, such as the subpar economy, the November elections, fiscal issues and Europe's debt woes, are diminishing. In short, it says things are getting better.
"What's driving the market narrative right now is a burgeoning sense of recovery and confidence," says Farmer. "The Dow is emitting a signal that sentiment is on the rise."
The Dow's long reputation for reflecting the national mood and acting as a leading economic indicator also bodes well, he says.
"The Dow provides historical touchstones," says Farmer. "When Americans hear the number of points the Dow is up or down, their minds immediately translate that. The 14,000 number has a reference quality to it and has enormous value in itself."
Since its last high in October 2007, the Dow has been powered higher by home-improvement retailer Home Depot, up 99%, IBM, up 73% and fast-food chain McDonald's, up 67%.
One benefit of the Dow's positive news is that investors who have been sitting out the rally, either in cash or bonds, might start funneling more of that so-called "safe money" back into stocks, says Moroney.
"If we can bust out to a new high it will add to the pain trade for those people who are underinvested in stocks," says Moroney.
The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at 14.5 times its trailing four-quarter earnings, a slightly cheaper price-to-earnings ratio than at its prior top in 2007. It sports a P-E that is 50% below where it was during the prior peak in 2000, according to S&P Capital IQ data.
Another plus is investors are far less exuberant than they were back in 2007, when stocks and real estate were flying high.
The so-called Dow Theory is also sending a bullish signal. In short when both the Dow industrials, which is made up of stocks that make stuff like computers and heavy earth- moving equipment, and the Dow transportation average, which is filled with companies that ship goods via rail, ship and trucks, are both in a major uptrend -- as they are now -- it suggests the market is in bull market mode.
While a correction can't be ruled out, the fact the Dow is at five-year highs suggests it is decision time for investors.
"You can't focus on the fact that you missed the rally," says Moroney. "The fact that the Dow was at 6,547 in early 2009 is not relevant. The question is what do you want to do today?"
Moroney says stocks offer a better alternative than bonds and cash.
Indeed, Dow 14,000 is back in play and in the headlines after the iconic 117-year-old blue chip index topped that lofty milestone Friday for the first time since October 2007.
The move pushed the world's best-known stock gauge up 149.21 points to close at 14,009.79, for its best level since the 2008 financial crisis. The benchmark index is not far from its Oct. 9, 2007, all-time high of 14,164.53 and the move is prompting talk of a new peak, and even Dow 15,000.
The Dow is now up 6.9% in 2013 and has rallied 114% since the bear market low in March 2009.
STOCKS FRIDAY: Jobs report ignites rally
The Dow's heady rush to levels not seen in more than five years, and potentially to heights it has never seen before, has elicited feelings of renewed hope and cautious optimism on Wall Street.
The sense of optimism comes from the fact that the Dow's rise is reflecting a growing belief that economies, both in the U.S. and around the world, are in a better place and on the road to recovery. Any signs of a sustainable economic recovery will also prove bullish for corporate profitability at a time when U.S. companies in the Standard & Poor's 500 stock index are already on track to post record earnings-per-share of $103.40 in 2012.
"This is just the beginning," says Jeremy Siegel, a finance professor at the Wharton School of Business at the University of Pennsylvania. He sees the Dow hitting 15,000 or even higher by the end of the year. "I think this is going to be a 20%-plus year for stocks."
Siegel says with cash yielding 0% and 10-year U.S. Treasury notes paying roughly 2% in interest, investors have little alternative other than to buy stocks in search of bigger gains. "Where else are they going to go for returns," says Siegel.
Main Street investors now have $2.4 trillion parked in money market funds, $6.7 trillion in bank savings accounts and $633 billion in low-yielding certificates of deposit, according to Peter Crane, publisher of Money Fund Intelligence, citing Federal Reserve data.
The lingering skepticism on the part of some investors comes from the knowledge that Dow 14,000 is an area where the stock market topped out in 2007 and a level that has acted more like a ceiling for stock prices, rather than a floor.
In fact, the Dow only closed above 14,000 on nine trading days in 2007, including its first-ever close above that psychologically important number on July 19, 2007.
It is not an overstatement to say that Dow 14,000 is the biggest round number the Dow has ever had to hurdle in its long history.
"Rarified territory is a good way to describe it," says Jamie Farmer, managing director at S&P Dow Jones Indices.
And the thinner the air, the tougher the slog.
"We are back to levels where the market has had trouble sustaining highs in the past," says Richard Moroney, editor of Dow Theory Forecasts newsletter.
While the Dow has a good shot at hitting a new high in 2013, it's more likely it will stop going straight up soon and settle into a range that will keep it trading around 14,000 for most of the year, cautions Jeff Kleintop, chief market strategist at LPL Financial. He notes that the blue-chip gauge got off to a rip-roaring start last year and quickly climbed to 13,000 before stalling and not breaking out for good until December.
"Whenever we get to these big milestones," says Kleintop, "it seems to take the market a better part of a year to digest those gains."
A further massive run-up for the Dow right now seems unlikely because the market still will have to confront falling earnings estimates later in 2013 and more turbulence in Europe ahead of key German elections in the fall, Kleintop says. Wall Street analysts expect double-digit earnings growth in the final two quarters of this year, according to Thomson Reuters. But Kleintop says those lofty estimates will have to come down due to a still-weak global economy. Fourth-quarter 2012 earnings are estimated go grow 3.8%, Thomson Reuters says. And 68% of the nearly half of companies in the S&P 500 that have reported have topped forecasts, which is better than the 62% long-term average.
Frank Fantozzi, president and CEO of Planned Financial Services, an independent wealth management firm, is also preaching caution to his high-net-worth clients. "We're being very cautious now," he says, adding that he expects virtually zero economic growth in the first three months of 2013 as the nation adjusts to higher taxes and less government spending.
"If we get zero GDP growth in the January through March quarter, there is no way the Dow will be still at 14,000," says Fantozzi. He says he wouldn't be surprised if the Dow suffered a 3% to 5% price correction.
He also doesn't believe the early signs in 2013 of Main Street investors putting their money back into the stock market will prove long-lasting. Individual investors poured $16.1 billion into U.S.-stock mutual funds in the three weeks ended Jan. 23, according to the Investment Company Institute, the mutual fund industry trade group.
But Fantozzi's view is that this is more of a sign of investors who fled the market late in 2012 amid "fiscal cliff"-related fears returning to stocks, debunking the bull-driven theory of a flood of new money entering the market.
"It's people buying back in after getting out last quarter," he says. More than $9 billion exited domestic stock mutual funds in the week ended Jan. 2.
But records are meant to be broken, and there are reasons why the Dow has been rising and a case to be made that the rally has room to run, and a new record high is within reach.
The Dow's move up, Farmer says, has been driven by a growing belief that headwinds, such as the subpar economy, the November elections, fiscal issues and Europe's debt woes, are diminishing. In short, it says things are getting better.
"What's driving the market narrative right now is a burgeoning sense of recovery and confidence," says Farmer. "The Dow is emitting a signal that sentiment is on the rise."
The Dow's long reputation for reflecting the national mood and acting as a leading economic indicator also bodes well, he says.
"The Dow provides historical touchstones," says Farmer. "When Americans hear the number of points the Dow is up or down, their minds immediately translate that. The 14,000 number has a reference quality to it and has enormous value in itself."
Since its last high in October 2007, the Dow has been powered higher by home-improvement retailer Home Depot, up 99%, IBM, up 73% and fast-food chain McDonald's, up 67%.
One benefit of the Dow's positive news is that investors who have been sitting out the rally, either in cash or bonds, might start funneling more of that so-called "safe money" back into stocks, says Moroney.
"If we can bust out to a new high it will add to the pain trade for those people who are underinvested in stocks," says Moroney.
The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at 14.5 times its trailing four-quarter earnings, a slightly cheaper price-to-earnings ratio than at its prior top in 2007. It sports a P-E that is 50% below where it was during the prior peak in 2000, according to S&P Capital IQ data.
Another plus is investors are far less exuberant than they were back in 2007, when stocks and real estate were flying high.
The so-called Dow Theory is also sending a bullish signal. In short when both the Dow industrials, which is made up of stocks that make stuff like computers and heavy earth- moving equipment, and the Dow transportation average, which is filled with companies that ship goods via rail, ship and trucks, are both in a major uptrend -- as they are now -- it suggests the market is in bull market mode.
While a correction can't be ruled out, the fact the Dow is at five-year highs suggests it is decision time for investors.
"You can't focus on the fact that you missed the rally," says Moroney. "The fact that the Dow was at 6,547 in early 2009 is not relevant. The question is what do you want to do today?"
Moroney says stocks offer a better alternative than bonds and cash.
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