Dow Jones index closes above 14,000
Americans are doing something they haven’t done in years — they’re buying stocks.
Individual investors are pouring money into the stock market this year. They’ve been drawn by the powerful rally in share prices and are desperate for better returns than the minuscule yields available from bonds and bank accounts.
This renewed enthusiasm helped the Dow Jones industrial average achieve a milestone Friday, surging above 14,000 points for the first time since the financial crisis struck.
The world’s best-known stock index has more than doubled from its crisis-era low and is nearing an even more impressive mark — a new all-time high. After closing at 14,009.79 points on Friday, the Dow is less than 155 points from its October 2007 peak.
“We’ve come a long way,” said Seth Masters, chief investment officer at Bernstein Wealth Management Group in New York. “There was a great financial crisis five years ago and there was a lot of repair that had to happen in the corporate world and for consumers.”
The surge in the Dow is part of a broader rebound in stock markets around the world, many of which are up 6% or more this year.
The rally is a measure of the recovery from the debilitating financial crisis that lashed the economy. And the improved optimism among investors stands in sharp contrast to the anxiety that pervaded financial centers and world capitals during the crisis.
Investors at the time feared a cataclysmic meltdown after the historic collapse of Lehman Bros. and the seizing up of capital markets throughout the world. The Federal Reserve took a series of emergency measures, including dramatically lowering interest rates and introducing unprecedented stimulus programs to revive growth.
Now investors are hoping that the gruelingly slow convalescence in the U.S. economy and job market will quicken as the year progresses.
“Investors are perceiving that the economy is doing better — that the worst days are behind us,” said Paul Zemsky, chief investment officer of multi-asset strategies at ING Investment Management in New York.
On Friday, the Labor Department reported that the U.S. economy added 157,000 jobs in January. The report pushed stocks higher, sending the Dow up nearly 150 points.
That was fewer jobs than economists predicted, but the report also showed that employment growth was faster than thought in 2012, with 127,000 more jobs added in November and December than the government’s previous estimates.
Small investors’ renewed interest in stocks has been driven by their search for an alternative to the maddeningly low interest rates on fixed-income investments.
Joe Mills had long invested in stock mutual funds in his 401(k) retirement account. But he was earning next to nothing in a money-market mutual fund, so he bought his very first stock in August 2011.
He now has stakes in four companies, including Apple Inc. and Procter & Gamble.
“I feel like the risk of having zero return [in bonds] over the next 20 years is greater than the risk of selecting some stocks,” said Mills, a 44-year-old structural engineer from Beckley, W.Va.
The rush into stocks is a mixed blessing, experts say.
Stocks have offered the best returns historically, and aging baby boomers deeply behind in retirement savings need all the help they can get.
But their renewed interest underscores how many people missed the rally for fear of getting scorched by another bear market.
“People by and large over the last five or six years have been deeply seared by the experience of 2008 and the ups and downs in stocks since then,” said Masters of Bernstein Wealth Management. “There has actually been a bull market since March 2009, but they really don’t feel at all like they’ve been in a bull market.”
The market’s vault higher also belies the continuing economic pain being suffered by millions of Americans struggling to cope with still-high unemployment and poses a risk if economic expectations don’t pan out.
Share “prices have recovered far better than the underlying economy,” said Jason Hsu, chief investment officer at Research Affiliates in Newport Beach. “That always gives me some concern about whether prices are baking in too much. Has it become too bullish, too optimistic given what the real economy is doing?”
It’s unclear whether individual investors’ budding infatuation with stocks will last.
Investors have plowed nearly $30 billion into equity mutual funds in the first three weeks of this year, according to the Investment Company Institute. That follows a collective $533 billion in withdrawals from 2008 to 2012.
But January is a traditionally strong month for the market as individuals invest year-end bonuses and set up individual retirement accounts in anticipation of the upcoming tax season. Investors stuffed money into stocks in early 2011, for example, only to see the trend reverse later in the year.
Also, many erstwhile stock investors have settled comfortably into bonds in recent years. They’re content to accept the historically lower returns from fixed income in place of the volatility inherent in stocks.
Bonds have produced exceptionally strong gains in recent years. In addition to pocketing interest payments, investors have benefited as falling interest rates have increased the underlying value of their securities.
The risk is that the process could reverse as interest rates rise, which many experts believe will happen in coming years as the economy improves.
That could deal an unexpected blow to investors who thought they were being cautious.
Experts also worry about a potential small-investor backlash if stocks slip into even a modest tailspin.
The Dow has climbed nearly 12% from mid-November and in a virtual straight line up in January. Based on history, it would be normal for share prices to give back some of their gains before resuming their advance.
“If you missed it, this might not be the right time to jump into [the market] because it’s done so well,” Hsu said. “People were not invested in equities when they were cheap and could be opportunistic, and they pay attention only after equities have done very well.”
