Dow storms to record
A record-setting day on Wall Street was not a big deal for all.
The Dow — the most visible symbol of American capitalism — closed higher than ever before on Tuesday.
A measure of the worth of the nation, based on the stock prices of 30 of its largest companies, the Dow Jones industrial average closed at 14,253.77, up 125.95 points, or 0.89 percent.
The record of 14,164.53 was set on Oct. 9, 2007, before the mortgage and credit crisis and Great Recession.
The index leaped from its open at 9:30 a.m., and climbed as much as 158 points early and peaked at 14,286. Twenty seven of the 30 stocks rose, with industrial companies leading the way.
“It makes me feel good,” said Leslie Boltey, a Highmark Inc. employee from Oakmont, when told of the record.
For her and many others, though, who have a pension or a 401(k) through their employer, Wall Street's achievement was not top-of-mind on Tuesday afternoon.
“I count on others to invest for me” in a 401(k), Boltey said. “I follow their direction.”
Jerry Bishop, who has driven to work in Pittsburgh each day from East Liverpool, Ohio, for the past 20 years, said he hasn't paid much attention to the stock market. That changed just last week with changes in his 401(k) and meetings at work to explain them.
“I followed my adviser (and) always paid into my account,” Bishop said.
Even so, the Dow's gain on Tuesday represented a remarkable comeback for the stock market and investors. The Dow has more than doubled since falling to a low of 6,547 in March 2009, following the financial crisis and the beginning of the Great Recession. Stocks have rebounded sharply since then, helped by stimulus from the Federal Reserve, even as the economic recovery has been slow and steady.
“Obviously it's an indication that the economy continues to recover from the Great Recession,” said Gus Faucher, senior economist at PNC Financial Services Group Inc. in Pittsburgh. “It's an indication that investors think the economy will continue to improve — a near-term bet on the future of the economy.”
Consumers have or soon will recover all their net worth that was lost from the collapse of stocks and home prices during the recession, Faucher said.
And higher stock prices are good for the economy. “When household wealth goes up, consumers are a little bit more willing to spend and contribute to economic growth,” he said. The same can be said for corporations. “It's a self-reinforcing cycle.”
Household net worth — according to Sept. 30 figures from the Federal Reserve — was down only 4 percent since before the recession. Net worth fell 24 percent from Sept. 30, 2007, to March 31, 2009.
Given recent and future gains, if net worth hasn't fully recovered, “it will sometime this year. It could already be there,” Faucher said.
Consumers are showing signs that they are using some of that recaptured personal wealth to invest in stocks.
“We have investors who were scared by the market in the aftermath of the crash,” Faucher said. Their alternatives, depositing money in fixed-income investments such as certificates of deposit or bond mutual funds, have had very low returns. “So if you want a higher return, you have to look at the stock market.”
Andrei Voicu, chief investment officer for Fragasso Financial Advisors, Downtown, said that in the past month, investors moved more money into stocks. “People are less nervous,” he said.
As of Jan. 31, they placed $33 billion in domestic and international stock funds, compared to $38 billion in taxable and municipal bond funds. The previous 12 months, investors pulled $82 billion out of stocks and invested that money in bonds, Voicu said, citing Morningstar figures.
Stocks also are benefiting from the economic stimulus from the Fed and other global central banks.
Under a program called “quantitative easing,” the Fed has bought trillions of dollars of bonds, pushing up their prices and sending their yields lower. That makes stocks more attractive to investors than bonds and keeps interest rates low, encouraging investment and spending.
Marvin Goodfriend, professor of economics at Carnegie Mellon University's Tepper School of Business, said the Fed has signaled it will continue to hold rates low.
“That has to be the prime factor in stock market performance,” he said. “The markets will price stocks where they think they are sustainable.”
The Fed targeted a 6.5 percent unemployment rate as its goal. Unemployment was just 4.7 percent when the Dow last reached a record five and half years ago, versus 7.9 percent today.
But if stock prices are held artificially high, “there's a day of reckoning to come,” Goodfriend said. “It may be there's good news in these stock prices, but there may be some artificiality. It may not be able to last.”
It's also true, he said, that corporate profits are high because the labor market has been exceptionally weak. Wages are lower than in previous economic recoveries. That's contributing to high profits, he said.
PNC's Faucher said corporate profits are up 19 percent and gross domestic product, a measure of the economy's growth, is up 10 percent from before the recession, “so the stock market hasn't gotten ahead of itself.”
The Dow has risen 9 percent so far this year. For all of last year, the index rose 7 percent.
The Standard & Poor's 500 stock index, a broader measure of overall stock prices, closed Tuesday up 15 points, or 1 percent, to 1,539.79. The index is 25 points from its record close of 1,565.
“It's telling the same story as the Dow, even though it's not back to its highs before the recession,” Faucher said.
The Dow has managed to climb to a record despite the backdrop of political wrangling in Washington, with automatic government budget cuts taking effect on Friday after President Obama and Congress failed to reach a budget deal. Economists expect the cuts to hurt economic growth, though Republicans and Democrats have pledged to retroactively undo the cuts.
The Associated Press contributed to this report. John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or firstname.lastname@example.org.