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Record High Close for Dow, Spurred by Fed and Profits As Fears Recede, Dow Industrials Hit a Milestone
(about 5 hours later)
Despite everything, the stock market is back at a record high. The economy may be struggling to recover, but by one closely watched measure the fear that not long ago paralyzed the markets has lifted.
The Dow Jones industrial average, which measures the performance of 30 blue-chip companies, closed with a gain of more than 125 points Tuesday, surpassing its previous record close of 14,164.53, which it achieved nearly five and a half years ago, as well as its record intraday high, set around the same time, of 14,198.10. The oldest and most popular gauge of the stock market on Tuesday surged past the nominal high it last reached more than five years ago, before the financial crisis hit with full force.
Of course, a few things have happened since October 2007. The housing market collapsed, the financial system went into meltdown, the European Union started to fray and politicians dragged the United States through an on-off-on-again fiscal imbroglio. In the past, such a recovery would have led to celebrations on Wall Street and spread optimism about the economy. But the gain by the Dow Jones industrial average — the stocks of 30 American corporate giants like Coca-Cola, ExxonMobil and Microsoft — was a more downbeat event.
 But stocks managed to move beyond all that. Wall Street executives were not dismissing the rally out of hand, but after several years of turbulence they were not cracking open the Champagne either.
 Since a low point in March 2009, the Dow Jones index has more than doubled, stunning even the most seasoned stock market watchers. It closed at 14,253.77 Tuesday. “The market reflects an improving economy in the U.S. and abroad,” said James P. Gorman, the chief executive of the Wall Street firm Morgan Stanley. “It helps individuals through their 401(k)’s and other investments. That being said, it has been a very fast move, and prudent investors would be well served to tread carefully and look for improving economic evidence to support any moves to higher levels.”
 “What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm. “We think this could be the biggest bull market of our careers.” It has taken nearly five and half years for the Dow to get this far. Now there are concerns about whether the forces that have driven the market rally — the huge stimulus actions by the Federal Reserve and banner corporate profits — will be sufficient to push it higher.
On Tuesday in particular, leading indexes abroad 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. Ordinary investors, who have largely sat on the sidelines of the market, will be asking themselves whether it is time to start investing in stocks again, given the gains that have already taken place.
After the bell sounded at the New York Stock Exchange, stocks were pushed up even more after a reading on the service sector in the United States showed that it had risen to its highest level of activity in a year, surprising analysts. “What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm. “We think this could be the biggest bull market of our careers.”
“Given that the service sector accounts for close to 85 percent of the U.S. economy, the strong performance on this index suggests that the overall recovery may be continuing to build on the positive momentum at the end of the year,” said Millan Mulraine,  a senior strategist at TD Securities. There are some important caveats to the record, however. The Dow is a rather narrow measure of the stock market, so it can provide a somewhat distorted picture of the market’s performance. The Dow broke through with a gain of 125.95 points, or 0.9 percent, closing at 14,253.77 on Tuesday. Since hitting a low in March 2009, with the panic of the financial crisis still fresh, the market measure has more than doubled.
At its Tuesday close of 1,539.79 points, the much broader Standard & Poor’s 500-stock index was still off its nominal high of 1,565.15, also set in October 2007. The recovery is remarkable because the American housing market remains weak, Europe still has moments of severe instability, and fiscal battles drag on in Washington.
After taking inflation into account, both indexes are down from their earlier highs in 2000. And, on an inflation-adjusted basis, the S.&P. 500 is down even after factoring in returns from dividend payments. Using other yardsticks, however, the performance of the blue-chip Dow does not look quite as impressive.
Still, American stocks are far ahead of their foreign counterparts. The Euro Stoxx 50, a barometer of euro zone blue chips, ended Tuesday at 2,683.02 points, off its record high of 5,464.43 reached in March 2000, while the FTSE 100 in London was at 6,431.95, compared to a record of 6,930.20 in December 1999. The much broader Standard & Poor’s 500-stock index, the benchmark favored by investment professionals, was slightly below its 2007 high even after it climbed 14.59 points on Tuesday, nearly 1 percent, to 1,539.79. And when adjusted for inflation, both the Dow and the S.& P. 500 were well below the levels they reached at the start of the last decade.
In Asia, the Nikkei 225-share index in Tokyo closed Tuesday at 11,683.45; it reached its high of 38,916 points in December 1989. And the Hang Seng index in Hong Kong finished at 22,560.50, versus a high of 31,638 points in October 2007. Previous highs occurred when investors believed the economy could keep growing without any extraordinary assistance. By contrast, this rally has occurred on the back of enormous monetary stimulus by the Fed and the world’s other central banks.
Despite its flaws, the Dow Jones average is the recognizable face of the stock market to many Americans, and it contains some of the best-known American corporations, like Wal-Mart, Coca-Cola, General Electric and International Business Machines. Since the end of 2007, five major central banks have injected some $6 trillion into the global economy, according to figures from the Bank for International Settlements. This was done to prevent bank runs and revive economies.
The stock prices of some of the companies in the index have more than doubled since that low point in 2009. For instance, American Express is up more than 400 percent. After the crash of 1929, it took 25 years for the Dow to get back to the nominal level it plunged from. The severe economic contractions of the 1930s, during which scores of banks collapsed, weighed heavily on stocks. As the stimulus forced down interest rates, it eventually whetted investors’ appetite for riskier assets like stocks.
But one essential government institution did things differently after the 2009 low point, and that has bolstered the stock market. The Federal Reserve 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. “Central banks do matter. Central banks have always mattered,” said David Rosenberg, chief economist at Gluskin Sheff and Associates, who started work as a Wall Street economist on the day the stock market crashed in 1987.
Perhaps as important is the psychological shot in the arm: when investors believe the Fed is providing a systemic backstop, they will be more likely to get back into the market, and stay there. The looming question is what will happen when the Fed stops its stimulus. Mr. Rosenberg said that after the crisis the stock market declined sharply on two occasions when the Fed signaled that it might temper its monetary easing.
“The Federal Reserve is here, and is going to do everything possible to support this recovery,” Ben S. Bernanke, chairman of the Fed, said in an interview with “60 Minutes” in March 2009. It is probably more than coincidence that stocks began to recover strongly after that broadcast. “In both cases, the Fed backtracked,” he said.
“Central banks do matter. Central banks have always mattered,” said David Rosenberg, a chief economist at Gluskin Sheff and Associates, who started work as a Wall Street economist on the day of the 1987 stock market crash. “So long as the Fed is in an accommodative mode and the economy is out of recession, the odds are that you will have a bull market.” Still, the Fed’s easy money does not look like it is going to dry up soon. The stock market’s sharp move up in recent days occurred after two senior officials from the Federal Reserve, including the chairman Ben S. Bernanke, emphasized their commitment to a slack monetary policy.
That’s not to say that the Fed’s largess is the only reason stocks are up.  The Fed has said that it will keep up the stimulus until unemployment is well below current levels. And Fed policy makers will be all the more likely to take that stance if fiscal policy acts as a brake on the economy.
Company profits, which theoretically provide the basis for investing in stocks, have also surged. “Corporate earnings have been doing very nicely, thank you,” said Alan S. Blinder, professor of economics and public affairs at Princeton University. In aggregate, companies in the S.&P. 500 have not reported a decline in earnings since the third quarter of 2009. The strength of the stock market is not strongly reflected in the real economy. Consumer confidence is well below the level it hit during the last high in October 2007. The unemployment rate was then 4.7 percent, compared with 7.9 percent now.
The focus on profits explains why the stock market can be doing well while most people are not experiencing a resurgent economy. A bet on an index like the Dow is effectively a narrow wager on the profits of 30 companies, not necessarily the economic health of average Americans, said Mr. Blinder. “Corporate profits have done better than median wages,” he said. Some analysts question how much further the stock market can rise if the Fed’s actions do not lift the economy out of its sluggishness.
 The big question is whether the stock market can keep going up from here.  “I don’t think the market is going to look past several quarters of weak growth,” said Barry C. Knapp, a markets strategist with Barclays. He said the types of stocks that have done well this year are those that investors buy when economic growth is low, like health care and consumer staples.
 One determinant is whether stocks are seen by traders as relatively expensive, and therefore vulnerable to a sell-off. Robert J. Shiller, a professor of economics at Yale University, has built a model for gauging whether stocks are cheap or pricey. Right now, stock valuations are above historical averages, but well below the stratospheric highs they’ve reached in bubbles, he said. According to his model, stocks are signaling that they can return about 3 to 4 percent a year. Still, the recent rally has a strong corps of believers who have been bullish for a long time.
 “That’s not horrible,” he said, quickly adding that the stock market always has a mind of its own. “I think 2013 is a year where those who’ve been really skeptical of this market have to rethink their arguments,” said Thomas Lee, the chief U.S. Equity strategist at JPMorgan Chase.
Its unpredictability may deter individual investors, although they have recently shown signs of coming back into the market. Given that stocks have risen and then disappointed for over a decade, skittishness is understandable.   While acknowledging that much of the market’s gains have come from the Fed’s monetary policies, Mr. Lee said that corporate profits have continued to rise, and that other signs of confidence in the markets, like mergers and stock buybacks, have also rebounded.
The recent strong performance of the Dow Jones average also masks the woeful performance of some important companies. For instance, General Electric, held for generations in family portfolios, is down more than 40 percent from when the Dow last peaked in 2007. It may seem remarkable that Bank of America, grappling with a rat’s nest of issues, has risen by 200 percent from its 2009 low. But it is still nearly 80 percent below its high before the 2008 financial crisis. “I think we’ll have a bull market for several more years,” he said. “It’s been a pretty healthy rally.”
 Stock market analysts, of course, fret over what will happen when the Fed stops its stimulus. Stocks can become more vulnerable to declines when their valuations climb to historical highs. But right now stocks do not look particularly pricey.
 Mr. Rosenberg, the economist, noted that the stock market has declined sharply on the two occasions since the crisis that the Fed signaled that it might temper its money printing. “In both cases, the Fed backtracked,” he said. Robert J. Shiller, a professor of economics at Yale, has built a model for gauging whether stocks are cheap or expensive. Right now, stock valuations are above historical averages, but well below the stratospheric highs they have reached in bubbles, he said. According to his model, stocks are signaling that they can return about 3 to 4 percent a year.
Still, the Fed’s easy money doesn’t look like it is going to dry up any time soon. The Fed has committed to maintaining a loose monetary policy until unemployment is well below current levels. And its policy makers will be all the more likely to take that stance if fiscal policy acts as a brake on the economy. “That’s not horrible,” he said, though he was quick to add that the stock market had a mind of its own.
“How the Fed extricates itself is important,” said Mr. Bernstein, the money manager. “It could happen two, three, four, five years from now.” The stock market’s volatility has scared retail investors for several years. A total of $556 billion has been taken out of mutual funds focused on American stocks since October 2007, according to the Investment Company Institute. That is an enormous pot of money that largely missed out on the market’s recovery.
In the meantime, he said, he remains confused about why more investors aren’t buying stocks. “I just don’t understand why people don’t want to play,” he said. But recent figures show a sudden change of mind among retail investors. Over $55.1 billion flowed into equity funds in January and February, according to TrimTabs Investment Research, the highest two-month figure in the data company’s records.

Anne Bagamery contributed reporting from Paris.

Mr. Gorman of Morgan Stanley said, “I would hope retail investors don’t pile into the market at this point, but step in cautiously.”
In other indicators, the Nasdaq remained well off its 2000 high, up 42.10 points, or 1.3 percent, to 3,224.13.
In the bond market, interest rates edged higher, although they remain historically low. The price of the Treasury’s 10-year note slipped 5/32, to 100 30/32, while its yield rose to 1.90 percent from 1.88 percent late Monday.

Susanne Craig, Nathaniel Popper and Michael J. de la Merced contributed reporting.

This article has been revised to reflect the following correction:
Correction: March 5, 2013

An earlier version of this article referred incorrectly to the recent increase of investment in equity funds. The correct figure was $55.1 billion flowing into equity funds in January and February, not $77 billion in January.