New York: The Dow is back. All the way back at an all-time high, finally overcoming the losses tied to the 2008 financial Armageddon that rocked the world economy.
The Dow Jones industrial average jumped 125.95 points or 0.89 percent up, to close at 14,253.77 on Tuesday, sailing past its previous all-time closing high of 14,164.53 set on 9 October 2007.
Of course, a lot has happened since October 2007. The housing market imploded, the collapse of Lehman Brothers five years ago was the Pearl Harbour moment of a financial crisis that threatened to bring down the entire US financial system, the European Union started to fray, and even countries like India were not immune to the global slowdown.
On Tuesday, leading indices around the world rose after the Chinese government announced that it would step up spending and European data showed that retail sales there have been stronger than expected. Still, American stocks are far ahead of their foreign counterparts.
This has much to do with the fact that the Federal Reserve is in an accommodative mode and the US economy is on strong ground again with company profits surging. US interest rates are at ultra-low levels, thanks to the Fed’s bond-buying program to stimulate borrowing and job creation.
The US central bank has added more than $3 trillion of monetary stimulus to the economy and more than $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy.
Market expert Barry Ritholtz said that part of the rebound from the March 2009 lows is based on market fundamentals, but a big chunk is courtesy of the Federal Reserve and its chief Ben Bernanke.
“At least the first part of this rally is a rock-solid foundation,” Ritholtz told The Wall Street Journal. “The second half, the argument goes, is built on inorganic matter, primarily Fed liquidity and generosity.” If the Fed wasn’t doing QE4, the Dow would probably be 20-30 percent below where it is now, he said.
The fundamentals argument rests to a great extent upon the recovery of US corporate profits, rather than the Fed’s massive stimulus efforts. Still, whichever way you play it, we are seeing a bull run because not only is the central bank accommodative but company profits, which theoretically provide the basis for investing in stocks, have also surged.
“People are now starting to realize that it is a bull market,” Laszlo Birinyi, president of Birinyi Associates, said on Bloomberg Radio’s Surveillance. “It’s not going to come back, you’ve missed the train, and the train still has a long way to go. But you better get on it.”
Despite Tuesday’s excitement, what's important now is whether the stock market can hang onto its gains in the face of investor fears about the impact of $1.3 trillion in federal budget spending cuts this year that kicked in Friday. Bernanke has said the sequester-triggered cuts could cut at least 0.5 percent percentage point from 2013's economic growth.
"We now believe we are at the first of three market pivot points this year and suspect a drop is now likely to unfold over the next several months," Piper Jaffray's Craig W. Johnson and Leah Williams told CNBC. "We suspect this pullback in the broader market will be tactical in nature and may represent the single-best buying opportunity this year."
Piper analysts said that they anticipate a rollback in stocks approaching 10 percent as part of the full-year forecast of "a hop, a drop and a pop." The hop happened with the rise of more than 8 percent so far this year in both the Dow and Standard & Poor's 500.
The drop is what is over the near-term horizon. The analysts suggest the pop is what happens with a fairly strong rally after the pullback, then an easing through the rest of the way en route to a 2,000 price on the S&P by August 2014. The broader S&P 500 also surged, closing at 1,539.79, close to its record high close of 1,565.15 set on October 9, 2007, and a five-year high.