ECONOMIC INDICATORS

Dow average surges to record as profits stoke 4-year rebound

BLOOMBERG FILE PHOTO/TIM BOYLE
THE DOW JONES Industrial Average rose to its highest level ever, erasing losses from the financial crisis.
Posted 3/5/13

NEW YORK - The Dow Jones Industrial Average rose to its highest level ever, erasing losses from the financial crisis after a four-year rally fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve.

Almost $10 trillion has been restored to U.S. equities as retailers, banks and manufacturers led the recovery from the worst bear market since the 1930s. It took the Dow less than 65 months to rise above its previous high set on Oct. 9, 2007, more than a year faster than the recovery from the Internet bubble.

While the Dow has more than doubled in the four years since its bear-market low, its valuation remains 20 percent less than the price-earnings ratio at the previous peak and 15 percent below its 20-year average. Bulls say that’s a signal stocks have room to keep rallying, while to bears it shows a lack of confidence in earnings growth and concern over the Fed’s ability to continue spurring the economy.

“Psychologically, it may give a sense that we have recovered a tremendous amount from the depths of the crisis,” Wasif Latif, the San Antonio-based vice president of equity investments at USAA Investments, said by telephone. His firm oversees $54 billion. “On the other hand, it could create a sense of nervousness that we reached an all-time high, so how much more is there to go?”

The 116-year-old Dow jumped 0.7 percent to 14,226.2 today at 9:40 a.m. in New York, climbing above the 14,164.53 record closing level it reached before the global financial crisis. It also eclipsed its previous intraday high of 14,198.1 from Oct. 11, 2007. The gauge plunged 34 percent in 2008 for the worst performance in 77 years as the housing bubble burst and the U.S. financial system required a government bailout.

Rally leaders

American Express Co., Caterpillar Inc. and Home Depot Inc. have led the Dow’s rally since its 2009 low, climbing more than 275 percent as the economy recovered from the worst recession in seven decades. Hewlett-Packard Co., the largest personal computer maker, is the only stock still in the 30-company gauge to fall since March 9, 2009. The shares tumbled 22 percent as mobile devices such as Apple Inc.’s iPad and iPhone began to compete with PCs. Exxon Mobil Corp., which has rallied 38 percent, is the second-worst performer since the gauge bottomed.

Bankruptcies and government bailouts helped make the Dow a different gauge than it was in 2007. Citigroup Inc., American International Group Inc. and General Motors Corp. were removed from the price-weighted average, while Cisco Systems Inc. and Travelers Cos. joined. Kraft Foods Inc., which took over AIG’s spot, was replaced by UnitedHealth Group Inc. last year after the food-maker split in two.

$2.3 trillion

A rebound in corporate profits coupled with more than $2.3 trillion in Fed stimulus have pushed investors back into equities, sending the Dow up more than 116 percent from its March 2009 low of 6,547.05. The Standard & Poor’s 500 Index is less than 3 percent below its record, reached the same day as the Dow.

The Dow surpassed its dot-com-era record on Oct. 3, 2006, 81 months after it peaked in January 2000. The measure had tumbled 38 percent from the 2000 high of 11,722.98 to its bottom on Oct. 9, 2002, as the Internet boom collapsed.

The gauge on average has taken about 6 1/2 years to return to previous record levels, according to data compiled by Bloomberg. Should the measure have followed that path, the Dow wouldn’t have posted a new record until the middle of 2014.

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