High Dow signals investors' high confidence
Rightly or wrongly, investors have a sanguine outlook on the US economy, if the record-performing Dow Jones Industrial Average is the reliable indicator that market-watchers believe it to be.
Having surpassed 12000 for the first time last week – closing at 12011.73 Thursday and 12002.37 Friday – the Dow is signifying confidence among investors that economic growth will continue next year, even if at a slower pace. And, if the economy is OK, then future earnings prospects of blue-chip companies such as GE and Citigroup are also promising.
"The Dow really reflects the economic mood, the social mood, the political mood," says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. "It's really a window on the heartland of the country."
To reach the 12000 milestone, the Dow has climbed a wall of investor concerns. Would the Federal Reserve (meeting again Tuesday and Wednesday) push interest rates too high and trigger a recession? Would investors look elsewhere for financial safety amid unnerving geopolitical news, from North Korea's nuclear test to uncertainty over oil supplies? Then there's the midterm election, which may have a bearing on future tax rates. The latest worry: an inflationary signal last Tuesday from the Producer Price Index, which rose 0.6 percent (excluding food and energy).
Despite these concerns some economists see investors focusing on the positives, not negatives. Last Wednesday, the closely watched Consumer Price Index showed a benign inflation rate – a report that sparked a 42.66 rally in the Dow.
"We have avoided the Fed continuing to raise interest rates and, secondly, we've avoided a deep recession or downturn," says John Silvia, chief economist at First Union National Bank in Charlotte, N.C. "The stock market is celebrating modest below-trend economic growth."
The pickup in the Dow, which is up 12 percent this year, coincides with a more stable oil price. The price per barrel is now about $60. The Organization of Petroleum Exporting Countries (OPEC), concerned that the price had dipped closer to $58, announced Friday it would cut production by 1.2 million barrels a day. That was larger than expected, but analysts were skeptical the cartel would follow through.
"We have consistently seen, through the fourth quarter, energy prices come down because of relatively light demand and relatively high supplies," says Jeffrey Kleintop, chief investment strategist at PNC Wealth Management in Philadelphia. "OPEC has cut production before, and the price of oil has continued to fall for another three quarters."
It's been a long climb back for the Dow. During the heady days of the year 2000, the Dow hit a high of 11723. Then it crashed through 2001 and much of 2002. By October of that year, it hit bottom at 7286, down 37 percent from its high.
Late in 2002, the Federal Reserve began aggressively cutting interest rates. Since then the Dow has tacked on almost 4,000 points, or about a 50 percent gain.
It would not be surprising if the market continues past 12000. In 16 of the last 18 years, the Standard & Poor's 500, a broader index than the Dow, has experienced a fourth-quarter rally that has averaged 7 percent. In addition, the stock market since World War II has posted a double-digit gain, an average of 30 percent, during midterm elections years.
Of course plenty of professionals warn investors not to jump in. They see too many risks ahead, perhaps an unscripted economic downturn, perhaps a meltdown in the housing market.
"Everyone has their pink glasses on right now," says Axel Merk, manager of the Merk Hard Currency Fund in Palo Alto, Calif. "That makes me extremely nervous."