A milestone on the road to recovery
The Dow Jones industrial average barreled past the 10,000-point milestone for the first time in a year Wednesday, a testament to Wall Street’s powerful rebound from the financial crisis -- but also to a lost decade that has left many people worse off than they were 10 years ago.
Robust profits at banking giant JPMorgan Chase & Co. and tech bellwether Intel Corp. drove the blue-chip index up almost 145 points to 10,015.86, underscoring the stock market’s growing consensus that the punishing global recession is giving way.
The turnaround is all the more remarkable given the severity of the bear market, which sent the Dow plunging 54% from October 2007 through early March amid falling home values, a collapse in mortgage lending and the worst economic downturn since the Great Depression.
But the speed of the seven-month rally -- with stocks accelerating at their fastest pace since the 1930s -- has spurred fear that share prices have gotten ahead of the economy, which is believed to have stopped shrinking but remains weak. The worry is that stocks could fall hard again if the economy slips back into recession, something that some economists say is a possibility.
Many investment professionals, however, contend that the stock market can continue to defy the naysayers and build on its gains.
“There’s still room to keep going,” said Phil Roth, a market analyst at New York brokerage house Miller Tabak & Co. “You have be careful how you play the rally, but it would be a bigger mistake to fight it.”
Still, the Dow’s return to five-digit territory highlights the deep scars many individual investors have suffered in the last decade. It also underscores today’s sharp divide between the renewed prosperity of Wall Street and the still-deep struggles of Main Street.
Powerhouse banks such as JPMorgan and Goldman Sachs Group Inc. are notching blockbuster profits thanks to speedy recoveries in their trading and finance businesses -- and are on track to pay out huge employee bonuses as a result.
Through the first nine months of the year, JPMorgan has allocated $21.8 billion for bonuses and other compensation, a 23% rise from last year. That includes $8.8 billion at its investment banking division, or almost $354,000 for each of the unit’s 24,828 employees.
Goldman Sachs, which is expected to report a mammoth profit today, is on pace to shell out more than $770,000 to each of its nearly 30,000 employees.
“As the markets continue to do well and firms like JPMorgan and Goldman Sachs see these high levels of profits, you can expect that bonuses will be paid out at the levels they were prior to the financial crisis,” said David Roberts, an executive-pay expert at Verus Research in Scottsdale, Ariz.
The bonuses are unlikely to sit well with the public and Congress because both firms were beneficiaries of the government’s huge bailout effort. JPMorgan received $25 billion in that program, while Goldman Sachs got $10 billion. Both have since repaid the money.
JPMorgan’s stock has almost tripled since March, while Goldman’s has nearly quadrupled since its low in November.
Yet many Americans are still grappling with shattered home values, decimated 401(k) retirement accounts and the threat if not the reality of unemployment. The nation’s employers slashed 263,000 jobs last month alone as the unemployment rate rose to a 26-year high of 9.8%.
It’s not unusual for Wall Street to benefit from an expected rebound in the economy before ordinary Americans see any improvement. But this recovery could be weaker and restore jobs more slowly than in past rebounds, producing a bigger gap between economic haves and have-nots, said forecaster Allen Sinai at research firm Decision Economics.
“There’s a dramatic night-and-day juxtaposition of a booming stock market and rich financial firms, and jobless Americans,” he said. “Part of the prosperity we’re seeing on Wall Street is because of massive job losses, which preserve profits.”
That division was shown in JPMorgan’s third-quarter results. The bank reported a $3.6-billion profit, even after recording a $3.8-billion expense to cover expected losses on loans to consumers struggling to pay their bills, nearly double the amount set aside in last year’s third quarter.
Profits at some companies are being generated more by cost-cutting than by any fundamental changes in business conditions. For example, job cuts at Johnson & Johnson helped the drug giant report better-than-expected quarterly earnings Tuesday despite disappointing revenue.
Many individual investors have stayed put in stocks throughout the turmoil, in part because alternatives such as low-yielding bank certificates of deposit are unattractive.
Still, two brutal bear markets this decade have taken an emotional toll on investors such as George Mendoza, 50. The TV animation producer from Altadena has stayed in the stock market but has shifted to more conservative holdings. He’s also lost some of his faith that his stock portfolio could finance his retirement.
“It’s like going out with a girl and she cheats on you,” Mendoza said. “My faith and trust in the stock market has been really shaken to the core.”
The Dow first crossed 10,000 in March 1999 before the popping of the Internet-stock bubble prompted a bruising bear market early this decade.
Even though the Dow is up a spectacular 53% from the 12-year low it reached in March, the index must rise 41% from its current level just to match its October 2007 record high.
“In 1999, we thought this was the beginning of a rocket ship riding to Dow 20,000,” said Art Hogan, chief market strategist at Jefferies & Co. in New York. “This time around, we’re hitting it because we’ve moved away from the edge of the abyss.”
But fear of that abyss has kept some people from benefiting from the rally. Although big investors such as hedge funds have generally poured money into stocks, individual investors have yanked a net $43.9 billion out of stock mutual funds in the first eight months of this year while boosting their holdings in more-stable bond funds.
Those who have missed this year’s bull run could be grateful for their conservatism if stocks resume their decline. And just as a housing bubble developed when individuals crowded in after the bursting of the 1990s Internet-stock mania, some experts fear that the rush into bonds could lead to a new bubble.
People who shook off this decade’s first bear market, in 2000-02, say they feel greater stress from the cumulative effect of the back-to-back downturns because they’re now a decade closer to needing the money in retirement.
“Now it’s 10 years later and I’m right back where I started,” said David Jankowski, a 48-year-old software-engineer manager from Carlsbad.
Some market watchers contend that the economy and the stock market will come under pressure as government stimulus efforts subside. Others say the market can climb higher this year thanks to enthusiasm over earnings and a continuing rush into the market by institutional investors who missed the early phase of the rally.
Crossing above 10,000 so decisively could fuel investor confidence, Hogan said.
“It has a lot more psychological benefit this time around,” he said. “It’s a milestone that reminds us that both the market and the economy have gotten better. If you’d have asked me back in March if I thought we would get back to 10,000 this year, I would have looked at you as if you had antlers.”
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