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Dow asks: What Great Recession?


March 06. 2013 12:05AM


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NEW YORK — The stock market is back.


Five and a half years after the start of a frightening drop that erased $11 trillion from stock portfolios and made investors despair of ever getting their money back, the Dow Jones industrial average has regained all the losses suffered during the Great Recession and reached a new high. The blue-chip index rose 125.95 points Tuesday and closed at 14,253.77, topping the previous record of 14,164.53 on Oct. 9, 2007, by 89.24 points.


“It signals that things are getting back to normal,” says Nicolas Colas, chief market strategist at ConvergEx Group, a brokerage. “Unemployment is too high, economic growth too sluggish, but stocks are anticipating improvement.”


The new record suggests that investors who did not panic and sell their stocks in the 2008-2009 financial crisis have fully recovered. Those who have reinvested dividends or added to their holdings have done even better. Since bottoming at 6,547.05 on March 9, 2009, the Dow has risen 7,706.72 points or 118 percent.


The Dow record does not include the impact of inflation. Adjusted for that, the Dow would have to reach 15,502 to match its old record.


The Standard and Poor’s 500, a broader index, closed at 1,539.79, 25.36 points from its record.


The last time the Dow hit a record, George W. Bush still had another year as president, Apple had just sold its first iPhone, and Lehman Brothers was still in business.


But unemployment was also 4.7 percent versus 7.9 percent today, a reminder that stock gains have proved no elixir for the economy.


Still, the Dow high is another sign that the nation is slowly healing after the worst recession since the 1930s. It comes as car sales are at a five-year high, home prices are rising, and U.S. companies continue to report big profits.


The stock gains have helped retirement and brokerage accounts held by many Americans recover. That, in turn, has helped push U.S. household wealth nearly back to its peak before the recession, though many in the middle class are still deep in the hole. Most middle-class wealth is tied up in home values, which are still a third below their peak.


Good economic news Tuesday helped lift stocks. Retail sales in the 17 European countries that use the euro rose faster than expected, China’s government said it would support ambitious growth targets, and a report showed U.S. service companies grew last month at their fastest pace in a year.


“It feels great,” says Marty Leclerc, chief investment officer at Barrack Yard Advisors, an investment firm. In early 2009, when stocks were plummeting, “it looked like Armageddon was nigh. It’s a lot more fun to be in a rising market.”


In the depths of the recession four years ago, few investors would have predicted such a fast recovery. Some feared another Great Depression. Banks were collapsing, lending was frozen, world trade was plunging and stocks were in free fall.


“People thought we were going to relive the 1930s,” says Robert Buckland, chief global stock strategist at Citigroup. He calls the stock gains since “pretty remarkable.”


From its peak in October 2007 to its bottom in March 2009, the Dow fell 54 percent. That was far less than the nearly 90 percent drop in the Great Depression but scary nonetheless. There had been 11 previous bear markets since World War II and none had reached 50 percent.


Dow records are dismissed by some investors as unimportant because the index comprises just 30 stocks. Many professional investors prefer to follow the S&P 500, which, as the name implies, tracks 500 companies. But the Dow has closely followed the ups and downs of its broader rival over the years, and is a good proxy for how big companies are doing.


The S&P 500 is up 128 percent from its March 9, 2009 low, about the same as the Dow.


The Dow record is a victory of sorts for Federal Reserve Chairman Ben Bernanke. Under his aegis, the Fed launched an unprecedented campaign to lift stocks by making their chief rival for investor money — bonds — less attractive.


Under a program called “quantitative easing,” the Fed has bought trillions of dollars of bonds to drive their yields down. The idea was that the puny yields would so frustrate investors, they’d have no choice but to shift into stocks. That, in turn, would push up stocks and make people feel wealthier and more willing to spend, helping the economy.


Just as Bernanke had hoped, American household wealth, or assets minus liabilities, has risen, though the gains haven’t been shared equally.


In the recession, household wealth fell $18.9 trillion, or 28 percent, as the prices of assets like stocks and homes tumbled. But after bottoming in the first quarter of 2009 at $48.5 trillion, wealth rose $16 trillion through the third quarter of last year and was within striking distance of its peak of $67.4 trillion, according to the latest data from the Federal Reserve. Gains since then may have pushed wealth to a new high.


Middle-class households have not recovered as much as those numbers suggest because most of their wealth is tied up in their homes, and home values haven’t bounced back like 401(k) accounts.


The rich have been the biggest winners of this bull market. Eighty percent of all stocks are held by the wealthiest 10 percent of households.


The question now: Can the stock rally continue? Here are four reasons it could:


— Plenty of cash: Companies have enough money to keep buying shares, which can push stocks up in the short term. Companies in the S&P 500 had more than $1 trillion in cash late last year, two-thirds more than in 2007.


— Low inflation and interest rates: Two factors that typically spell the end of a bull market seem a long way off. Inflation has been 1.6 percent the past 12 months, below the Fed’s 2 percent target. Interest rates are near record lows; the short-term rate the Fed controls is being kept between zero and 0.25 percent. The Fed has said it plans to keep the rate where it is until unemployment falls below 6.5 percent, or 1.4 points lower than it is today. Even when the Fed starts raising the rate, it could be years before it gets high enough to hurt the economy and stocks.


— Economic expansion: The economic expansion that began 44 months ago in June 2009 is still relatively young. The previous three expansions lasted 73, 120 and 92 months. And this one may finally be getting traction: Sales of new homes in January hit the highest rate in 4 ½ years. Home prices in January were up nearly 10 percent nationwide from a year earlier. And sales of autos, the second-biggest consumer purchase, reached a five-year high.


Most important, hiring is picking up. Employers added an average 200,000 jobs each month from November-January, compared with 150,000 in each of the prior three months.


— Stocks still seem reasonably priced based on the earnings that companies are generating. On average, stock prices are 17.5 times per-share earnings in 2012 versus 19.4 times in 2007. Today’s price-earnings ratio is the same as the average since World War II.


Of course, if investing was as simple as looking up interest rates and stock valuations, we’d all be rich. Plenty can go wrong.


For starters, future earnings, the biggest driver of stock prices, could prove disappointing.


Investors also need to pay attention to what’s happening in the rest of the world. Big U.S. companies generate nearly half their revenue from overseas. The 17 European countries that use the euro as a currency have been in recession for more than a year. Japan, the world’s third-largest economy, fell into one late last year. Stock markets tend to look ahead, so what matters is whether the recessions deepen in Europe and Japan or those economies start growing again.


Another worry is what will happen after the Federal Reserve stops stimulating the U.S. economy. Last month, minutes of the Fed’s last policy meeting were released, and they showed members disagreeing on when to stop. The Dow lost 155 points in two days.


Jeff Sica, founder of money manager Sica Wealth Management, says the rising market is good because it’s a sign of confidence. But he fears stocks could sink when the Fed stops buying bonds.


It’s a big “psychological reason the market is going up,” he says. “People know the Fed will continue to inflate assets.”


The Fed stimulus was in response to the worst economic recession since the 1930s.




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