Thread: Dow Clears Another Hurdle in Long Run

Dow Clears Another Hurdle in Long Run

By DONNA KARDOS YESALAVICH And KRISTINA PETERSON

NEW YORK—The Dow Jones Industrial Average briefly crossed above the 11000 level Friday for the first time in 18 months, marking another key milestone in what has been one of the strongest stock-market rebounds in history.

While the threshold has prompted less fanfare than when the Dow recaptured the 10000 level in October, it represents another big accomplishment for a measure that was below 7000 only a year ago.

The News Hub market wrap. Plus, Dow Jones Newswires's Paul Vigna and MarketWatch's Laura Mandaro discuss whether the Dow can finally regain the elusive 11,000 level. The market's rebound has been a surprisingly broad and powerful one that has come to the dismay of many a bear. Market observers have been calling for major pullbacks throughout, but none of the dips along the way have been that big and the market's upward momentum has often seemed unstoppable.

"The magnitude of this rally is directly correlated to the magnitude of the crash that preceded it," said Dan Wantrobski, director of technical research at Janney Capital Markets. "It's almost like reverse gravity."

The Dow broke 11000 briefly in the last minutes of trade Friday, climbing to 11000.98, before ending at 10997.35. The move extends a rally that's lifted the Dow 4.11% in the first quarter and 5.15% in March. It comes as investors grow increasingly confident about the economic outlook ahead of the start of the first quarter earnings season, which kicks off Monday with Alcoa Inc.

The Nasdaq Composite climbed 17.24, or 0.71%, to 2454.05, its highest close since June 19, 2008. The Standard & Poor's 500 advanced 7.93, or 0.67%, to 1194.37, its highest close since Sept. 26, 2008.

The Dow last closed above 11000 on Friday, Sept. 26, 2008, just over 10 days after Lehman Brothers filed for bankruptcy. The following Monday, the U.S. House of Representatives slapped down the Bush White House's $700 billion financial-rescue package, sending the measure down 778 points in one day, its largest point decline in history.

.That ushered in a dark period for the stock market, with the S&P 500 losing nearly 23% in the fourth quarter of 2008, followed by an almost 12% drop in the first quarter of 2009, before eventually hitting bottom that March. The recovery since then has been driven largely by historically low official interest rates along with extraordinary programs to jumpstart the economy from the Federal Reserve and other global central banks.

The flood of easy money has helped reflate stocks, along with other assets such as commodities, while also burnishing the appeal of higher-yielding corporate bonds.

Corporate earnings have also played a role. The components of the Standard & Poor's 500 index earned an average of $17.16 a share in the fourth quarter of 2009, a huge improvement from the 9-cent loss they incurred in the fourth quarter of 2008. That quarter was the only negative quarter of operating earnings in the index's history, said Howard Silverblatt, S&P senior index analyst.

"We've definitely turned a corner," Mr. Silverblatt said. "There's a long way to go, but we are seeing companies a lot more confident, with a lot of dividend increases." He added that the dividend raises "speak to the depth of the recovery and the growing confidence in the market."

To be sure, market bears continue to warn of the risks of the rally, which they say is based on shaky foundations.

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."There are too many cheerleaders for this market and not enough pragmatists," said Don DeWaay, CEO of DeWaay Capital Management. "They're overlooking some things that could be severely restraining. This market is driven by people who are looking for any shred of optimism that they can find. "

The surge in small-cap stocks has been a part of the overall rally too. As the specter of legislation loomed over health-care and financial stocks during the past year, small caps were often seen as less likely to suffer from policy changes. The Russell 2000 rose 59% over the past 12 months as investors increasingly comfortable with risk jumped into the higher-volatility smaller stocks.

The broad market recovery has come despite still-languishing home prices and high unemployment, two big factors that have made retail investors put far more money into bonds than stocks, despite low interest rates.

Data from the Investment Company Institute, which tracks the nation's mutual fund flows, show that from March 2009 through February 2010, retail investors put $419.96 billion in bond funds. Over the same period, they put $24 billion into equity funds, just a small fraction of the $249.68 billion they pulled out of equity funds from January 2008 through February 2009.

Given that the rally to 11000 has been dominated by institutional investors, the question now is whether recapturing that level will help bring the retail investors back.

Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets, is doubtful. "The retail investor has lost over 50% of their money twice in the last decade and is deeply wary of equities," he said.

Still, noted Robert Pavlik, chief market strategist at Banyan Partners: "When Main Street hears Wall Street is seeing some gains, despite the fact that they all hate us, it does bring about a sense of improvement in the general economy."

Janney's Mr. Wantrobski agreed, saying that that while 11000 may not the most important number, it will bring retail investors one step closer to returning.

"Dow 11000 as a psychological level doesn't mean as much as 10000, so there probably aren't going to be any parties," he said. "But eventually it's going to eat away at [investors] watching the train leave the station."

Write to Donna Kardos Yesalavich at donna.yesalavich@dowjones.com and Kristina Peterson at kristina.peterson@dowjones.com

http://online.wsj.com/article/SB1000142 ... ns_markets

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