Dow spikes to all-time record high
The Dow Jones Industrial Average soared to a record closing high on Tuesday, breaking through levels last seen in 2007 and as investors rushed in to join the party in anticipation of more gains.
The Dow Jones shot up 125.95 points, or 0.9 per cent, to 14,253.77 at the close. The Standard & Poor's 500 Index gained 14.59 points, or 1 per cent, to 1539.79. The Nasdaq Composite Index climbed 42.10 points, or 1.3 per cent, to 3224.13.
The Dow also set a new intraday high mark, hitting 14,286.37 before easing off late in the session. The broader S&P 500 remained nearly two per cent shy of its October 2007 record.
Surging investor confidence has pushed the Dow to an all-time high. Photo: Louie Douvis
The record-smashing performance came exactly four years after the Dow reached a crisis low of 6470, having lost more than half its value as the US sank into deep recession.
The Dow Jones Industrial Index since 1997
‘‘We had a tremendous run, from the lows in March of 2009 to March four years later,’’ said Mace Blicksilver of Marblehead Asset Management.
There was no specific news to drive trade on Tuesday; Asian and European markets were up moderately, with Europe then catching fire for stronger gains after the Dow powered past the old record within seconds of the market opening.
Signs of a strengthening US economy, continued support from the Federal Reserve, and fairly attractive valuations compared to other assets have boosted the Dow by almost 9 per cent so far this year. A strong reading in the US services sector, which accounts for the bulk of economic activity, was the latest indicator of improving demand.
The broader index of the US markets, the S&P 500, was also higher Tuesday, but at 1542.69 remained 2.2 per cent below its all-time trading high.
"I'm surprised at the speed of the gains, which have come at a pace that we can't annualise. But stocks are still not expensive, and we can expect to continue getting a reasonable advance from here," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Global Investments.
Recovery from financial crisis
The Dow, which weighs the stock prices of 30 top US companies in a range of industries, and has long been the main gauge of health in the capital markets, was last at these levels in October 2007, the virtual eve before a financial storm engulfed markets.
A bursting of the housing market and stocks bubble unleashed the deepest recession since the 1930s.
In the crash the Dow plunged 54 per cent over 15 months, the impact wiping out the savings of millions and feeding a crisis in the financial industry that forced the government to bail out banks and two major automakers.
But the rebound of company earnings, and with the Federal Reserve staying the course with an aggressive stimulus program involving high liquidity and record-low interest rates since the end of 2008, have fed the recovery in the stock markets.
Also helping has been a set of recent economic data that has been generally solid, if unspectacular.
It has raised new questions of whether a fresh, dangerous bubble is building in capital markets, an issue that has been debated in recent meetings of Fed policy makers.
But analysts mostly dismiss that, and describe rising, but cautious, confidence in the real economy.
Compared with the economic conditions in 2007, today's market looks stronger, said Art Hogan of Lazard Capital Markets. For one thing, corporate balance sheets are robust and support investment.
"The economy is in a better place," said Hogan. "The last time we were here, the economy was about to fall off a cliff."
Greg Peterson, director of research at Ballentine Partners, said the valuation multiples of earnings are low compared with historic norms.
"This high is imminently reasonable," Mr Peterson said. "It's not a bubble.
Lots of headwinds
The rise comes despite several headwinds that would not appear conducive to new market records, including continued recession in Europe; the slowing effect of $US85 billion in mandatory federal spending cuts from March 1; still-high joblessness and and tougher conditions for the average consumer who faces a higher payroll tax and higher gasoline prices at the pump.
Chris Low, chief economist at FTN Financial, said the record "is something that's been building for months and months."
"It's always significant, particularly significant because this economic cycle has been so challenging," Mr Low said.
Tuesday's surge came on the heels of rising equity markets in China and throughout Europe, Mr Low pointed out.
The rally gained additional support mid-morning from a pickup in US services sector growth in February, according to the ISM purchasing manager survey.
Outpacing the economy
In addition, the housing sector continued to show progress. For instance, pending home sales in January were 9.5 per cent above the year-ago level, according to the National Association of Realtors.
Still, recent economic reports suggests that the Dow is outpacing the economy as a whole.
Last week, the US Commerce Department reported that fourth-quarter economic growth came in at just 0.1 per cent, and the unemployment rate has been stuck around 7.9 per cent.
Some analysts see the Dow lingering in the current range until the real economy takes off with more force. Mr Low predicted most equities would have a hard time growing revenues much beyond 2 per cent in the near term.
"There is very low revenue growth in the S&P 500," Low said. "It is still positive, but it's not very fast."
But Paul Edelstein, an economist at IHS Global Insight, offered a more optimistic outlook.
"There's a lot of reasons for stocks to move higher" such as higher earnings and supportive monetary policy, Mr Edelstein said.
Individual stocks at record highs
Gains on Tuesday came across the board, with 10 of the Dow's 30 component stocks reaching new 52-week highs on a day when 456 securities hit new yearly highs on the New York Stock Exchange. The Dow Jones Transportation Average also closed at a new high after rising 1.5 per cent.
About 71 per cent of the NYSE stocks closed higher while 67 per cent of Nasdaq-listed shares ended in positive territory. About 6.41 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, slightly below the daily average so far this year of about 6.48 billion shares.
The blue-chip Dow's forward 12-month price-to-earnings ratio was at 15.87, compared with 16.99 during the 2007 highs, according to Thomson Reuters Datastream. The S&P 500's price-to-earnings ratio was at 13.5.
Outside the Dow, Google continued its gains with the stock rising 2.1 per cent to close at $US838.60, an all-time high for the Web giant. Google is the highest-priced stock in the S&P 500.
The Institute for Supply Management's services index showed growth accelerated in February to its fastest pace in more than a year.
Markets have shrugged off the stalemate between the congressional Republicans and the White House over automatic US government spending cuts, known as the "sequester." Other recent headwinds, including political turmoil in Europe, have also been navigated without much pain, with investors using any decline as an opportunity to buy.
"The economy is still expanding and improving despite the risk of higher taxes and lower spending," Mr McDonald said. "While you can never rule out a correction, we don't see the economy or the Fed getting in the way of the market."
Among Dow stocks hitting all-time highs on Tuesday were Walt Disney and 3M. All 10 of the S&P 500's industrial sector indexes rose, with tech shares among the day's gainers. Just two components ended lower - Coca-Cola and Merck, while Alcoa ended flat.
Qualcomm rose 2 per cent to $US67.97 after the world's leading supplier of chips for cellphones said it was raising its quarterly cash dividend by 40 per cent. BMC Software rose 3.7 per cent to $uS42.32 and Micron Tech added 3.9 per cent to $US8.73.
Shortly after the opening bell, the Dow rose above 14,198.10, the intraday all-time high reached in October 2007, when the world was heading toward the financial crisis. The Dow's previous closing high was set on October 9, 2007, when it ended at 14,164.53.
The broad benchmark S&P 500 is at a five-year high and about 2.3 per cent away from its all-time intraday high of 1576.09.
Fed's easy money
Equity investors have been welcoming signs of improvement in the US economy, but a big part of the rally that has continued in 2013 without a significant correction is the result of the US Federal Reserve's easy monetary policy and the near zero short-term interest rates since December 2008.
As the market is aware that the cheap money from the Fed would have to eventually end, more investors were growing cautious. While the CBOE Volatility Index, or the VIX, fell 3.8 percent on Tuesday, it is still above lows reached in February.
"It's clear the economy isn't ready to have the Fed leave," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York. "No one thinks we're going into a crisis like we did after 2007, but the sense of play is very telling. Even though people are in the market, they're very cautious and searching for yield.
"The caution is frustrated caution."