Dow Tops 10,000 as Stocks Soar
Stocks soared Wednesday, pushing Wall Street’s two best-known indexes back above key watermarks, as investors raised their bets on an economic recovery next year.
The Dow Jones industrial average leaped above 10,000 and the technology-dominated Nasdaq composite topped 2,000, as the rally that began shortly after the Sept. 11 terrorist attacks lured more investors into the market.
“What this market is telling you is that economic recovery next year is an absolute certainty,” said Henry Cavanna, senior U.S. equity portfolio manager at JPMorgan Fleming Asset Management. “Investors are throwing caution to the wind and [anticipating] a very positive outcome.”
The Dow rocketed 220.45 points, or 2.2%, to 10,114.29, the first close above 10,000 since early September. The Nasdaq index jumped 83.74 points, or 4.3%, to 2,046.84, its highest since early August.
Though the milestones are more psychological than anything else, and both indexes remain well below their peaks of 2000, Wednesday’s gains added weight to the belief that the worst “bear” market in 30 years has ended.
Yet some analysts warn that stocks already may be reaching frothy levels based on expected 2002 corporate earnings.
Wednesday’s surge was powered by more upbeat reports on the economy and from key technology companies. A widely watched index of activity in the services sector of the economy showed that growth resumed in November, adding fuel to the idea that the recession that began in spring has run its course, or will soon.
Wall Street’s bulls say that has been the singular message of the stock market’s rebound since Sept. 21, when share prices hit three-year lows in the sell-off that followed the Sept. 11 terrorist attacks.
The market’s gains have stunned many investors, in part because prices were rising even before the success of U.S.-led forces in routing the Taliban in Afghanistan.
But that has been the historical pattern, analysts note: Stock prices anticipate turns in the economy, rather than look backward. Stocks also were rallying in late 1990, before the Persian Gulf War began and before the economy was emerging from that era’s recession.
Many experts concede, however, that the mood of investors has been helped by the fact that no other terrorist strikes have occurred on U.S. soil other than the anthrax mail attacks.
Just as important, the Federal Reserve has slashed interest rates to 40-year lows since mid-September. The central bank is expected to cut its key short-term rate, now 2%, again next week, for the 11th time this year.
The effect of those cuts has helped the stock market win by default, some analysts say: Investors face paltry yields on money-market accounts and other alternatives to stocks. Now, the market’s continuing rally could help feed an economic pickup by boosting the “wealth effect”--making investors feel richer and thus more willing to spend money, as they see their retirement accounts and other stock investments rebound.
Since their Sept. 21 lows, the Nasdaq index has rocketed 43.8% and the Dow 22.8%.
Yet many individual investors say they aren’t watching the market as closely as they did in stocks’ heyday of the late 1990s. The plunge that wiped out trillions of dollars in stock value between March 2000 and September has made many people less apt to actively track their portfolios, or to react when stock values swing sharply.
“I have learned to ignore it,” said Jeff Brooks, a Los Angeles ticket broker. “When things were going great, I watched [stock prices] every day. But in the last few months, I quit watching so frequently. Now, I really don’t want to know.”
Brooks said he doesn’t make short-term trades, and that daily market movements have little effect on his life. “I still own the same things--Cisco [Systems], JDS Uniphase. They’re good companies. I’m just holding onto them and hoping that they come back.”
Although Cisco and JDS Uniphase were among Wednesday’s big technology stock winners, both still are down more than 60% from their highs in the last year.
“It is very encouraging to see the market going up, although I’m surprised,” said Marilyn Barrett, a Los Angeles attorney. “I didn’t think we’d have this much of a rally given all the uncertainty in the Middle East.”
Phil Berlioz, an L.A. software engineer, said he gets “warm fuzzies” when the market rises as it did Wednesday, but he, too, now tries to tune it out.
“I used to watch it a lot more, but after all those down cycles, it just got too depressing,” he said. “I know that my 401(k) has taken a beating, but it’s a long-haul investment so I don’t even look at it.”
Some analysts believe the market’s gains since September have primarily been powered by institutions and by short-term traders, rather than by individuals.
Barrett said she bought shares of a stock-index mutual fund after the Sept. 11 attacks because she thought the market immediately overreacted to the tragedy by tumbling as trading resumed, and also because of a sense of patriotism that made her want to buy American companies. But since then she has kept her discretionary income in cash, waiting until the investment environment looks more certain, she said.
“I think it’s very encouraging that the market has held up for the past several months, but I am still in a holding pattern,” she said. “I think that’s a common reaction right now.”
Many analysts warn that the market’s advance is growing more dicey because stock valuations--prices relative to expected 2002 earnings per share, for example--are steep by historical standards.
Still, the economic signals appear to be brightening, although gradually. In a report Wednesday, outplacement firm Challenger, Gray & Christmas Inc. said that announced job cuts plunged 25% in November from October.
Guardedly optimistic comments in recent days from software maker Oracle Corp. and computer networking giant Cisco, two bellwethers in the tech stock sector, also have helped spark the market, analysts said.
Brokerage Salomon Smith Barney on Wednesday raised its future profit estimates for the Standard & Poor’s 500 index companies for the first time in nearly two years.
“I’m of the school that the economy is going to recover faster and more strongly than a lot of people think, and it might start happening by the second quarter of 2002,” said Jon Burnham, manager of the Burnham Fund, a mutual fund that focuses on blue-chip stocks.
“The market is not always an accurate predictor,” JPMorgan’s Cavanna acknowledged, but he also expressed cautious optimism, saying, “I think some kind of economic recovery next year is the likeliest scenario.”
He said a scramble by major portfolio managers to buy tech stocks has helped propel Nasdaq. “Professional fund managers have been bulking up on the high-profile tech names in an effort to capture a part of this strong rally,” he said. “The ‘momentum’ investors have come on board.”
Some analysts fret, however, that stock valuations leave plenty of room for disappointment if the economy stays weak. Many tech stocks are priced at three or four times the level of the average blue-chip stock, relative to estimated 2002 earnings per share.
But Burnham said his biggest fear is a setback in the U.S. war against terrorism.
“The one real problem is the geopolitical situation and the threats to our country that remain,” he said. “The chances of another disaster like Sept. 11 have diminished because, as a country, we are so much more aware of the dangers than we were, but it has to be a serious concern.”
Barring geopolitical catastrophe, Burnham believes that the Fed’s aggressive moves to cut rates, combined with economic-stimulus proposals being pushed by President Bush and Congress, are likely to succeed in stoking recovery in 2002. House and Senate negotiators have started talks on the stimulus bill in Congress.
“I can’t recall in my 42-year career the kind of stimulus being piled on now,” Burnham said.
In addition to the billions being spent on the war effort and rebuilding New York, Burnham said he expects another substantial tax cut to be approved soon. He said the recent dive in energy prices also is boosting consumers.
“The drop in oil and gasoline prices is like an immediate tax cut,” Burnham said. “Every time I gas up, I pay $7 or $8 less than I did before. That’s real money.”
Another factor propelling stocks may be that investors have few, if any, enticing alternatives. Yields on money-market mutual funds sank this week to the latest in a string of record lows, according to IMoneyNet Inc. The average seven-day simple yield on taxable money funds dipped to 1.82%.
If a sliver of the $2.3 trillion parked in money funds moves into stocks, that could power the market higher, analysts say.
“When people start feeling like life is returning to normal, they stop thinking about capital preservation at any cost and start thinking about what kind of an interest rate they’re getting on their savings,” Cavanna said. “Right now we seem to be in the early stages of a return to normalcy.”
Still, the stock market is “not inexpensive,” Cavanna conceded. It was high stock valuations in early 2000 that helped precipitate the market’s stunning collapse, led by technology.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Heady Gains
(tabular data not included)
