News Column

14,000: Bull Run or Just Bull?

Feb. 4, 2013

Adam Shell, USA TODAY

When it comes to big round numbers with major investment significance, 14,000 is as big as it gets for the Dow Jones industrial average.

Indeed, Dow 14,000 is back in play and in the headlines after the iconic 117-year-old blue-chip index topped that lofty milestone Friday for the first time since October 2007. The 149-point gain pushed the world's best-known stock gauge to a close of 14,009.79, its best level since the 2008 financial crisis. The index is not far from its Oct. 9, 2007, all-time high of 14,164.53, and its recent ascent is prompting talk on Wall Street of a new peak, and even Dow 15,000.

The Dow's heady rush to levels not seen in more than five years -- and potentially to heights never seen -- has elicited feelings of renewed hope and cautious optimism on Wall Street.

The sense of optimism comes from the fact that the Dow's rise reflects a growing belief among investors that economies, both in the U.S. and globally, are in a better place and on the road to recovery. Any signs of a sustainable economic recovery will also prove bullish for corporate profitability at a time when American companies in the Standard & Poor's 500-stock index are already on track to post record earnings per share of $103.40 in 2012.

"This is just the beginning," says Jeremy Siegel, a finance professor at the Wharton School of business at the University of Pennsylvania. He sees the Dow climbing to 15,000 or higher by the end of the year. "I think this is going to be a 20%-plus year for stocks," he says.

Siegel says that with cash yielding 0% and 10-year U.S. Treasury notes paying roughly 2% in interest, investors in search of bigger gains have few alternatives and have little choice other than to buy stocks. "Where else are they going to go for returns?" Siegel asks.

And stocks have been the place to make money in recent years. The Dow is up 6.9% in 2013 and has rallied 114% since the bear market low in March 2009.

Risk-averse Main Street investors now have $2.4 trillion parked in money market funds, $6.7 trillion in bank savings accounts and $633 billion in low-yielding certificates of deposit, according to Peter Crane, publisher of Money Fund Intelligence, citing Federal Reserve data.

The lingering skepticism on the part of some investors comes from the knowledge that Dow 14,000 is an area where the stock market topped out in 2007 and a level that has acted more as a ceiling for stock prices than a floor.

In fact, the Dow only closed above 14,000 on nine trading days in 2007, including its first-ever close above that psychologically important number on July 19, 2007.

It is not an overstatement to say that Dow 14,000 is the biggest round number the Dow has ever had to hurdle in its long history. "Rarified territory is a good way to describe it," says Jamie Farmer, managing director at S&P Dow Jones Indices.

And the thinner the air, the tougher the slog. "We are back to levels where the market has had trouble sustaining highs in the past," says Richard Moroney, editor of Dow Theory Forecasts newsletter.

Hold on, not so fast

While the Dow has a good shot at hitting a new high in 2013, it's more likely it will soon stop going straight up and, instead, settle into a trading range keeping it around 14,000 for most of the year, cautions Jeff Kleintop, chief market strategist at LPL Financial.

He notes that the blue-chip gauge got off to a rip-roaring start last year and quickly climbed to 13,000 before stalling and not breaking out for good until December.

"Whenever we get to these big milestones," says Kleintop, "it seems to take the market a better part of a year to digest those gains."

A massive run-up for the Dow from current levels seems unlikely, Kleintop adds. The market still could be faced with turbulence from overly optimistic earnings estimates later in 2013 and with headwinds in debt-strapped Europe ahead of key German elections in the fall, he warns.

Wall Street analysts expect double-digit earnings growth in the final two quarters of this year, according to Thomson Reuters. But Kleintop says those lofty estimates will have to come down due to a still-weak global economy and fiscal pressures at home. By comparison, fourth-quarter 2012 earnings are estimated to grow 3.8% vs. the same period a year earlier, says Thomson Reuters.

Frank Fantozzi, president and CEO of Planned Financial Services, an independent wealth-management firm, is also preaching caution to his high-net-worth clients.

"We're being very cautious now," he says, adding that he expects virtually no economic growth in the first three months of 2013 as the nation adjusts to higher taxes and less government spending.

"If we get zero GDP growth in the January through March quarter, there is no way the Dow will still be at 14,000," says Fantozzi.

He also doesn't believe Main Street investors are flocking back to the stock market as early fund-flow data this year suggest. Individual investors poured $16.1 billion into U.S.-stock mutual funds in the three weeks ended Jan. 23, according to the Investment Company Institute, a fund trade group. But Fantozzi says those positive flows won't prove to be long-lasting. The early surge of cash into stocks, he says, is simply from investors who fled stocks late in 2012 amid fiscal cliff-related fears putting their cash back to work in stocks.

"It's people buying back in after getting out last quarter," he says. More than $9 billion exited domestic stock mutual funds in the week ended Jan. 2, ICI data show.

Reasons for rallies

But records are meant to be broken. And there are reasons the Dow has been rising. There is also a case to be made that the rally has room to run, and that a record is within reach.

The Dow's move up, Farmer says, has been driven by a growing belief on Wall Street that headwinds, such as the subpar economy, the November elections, U.S. fiscal issues and Europe's debt crisis, are diminishing.

In short, the Dow is telling us that things are getting better.

"What's driving the market narrative right now is a burgeoning sense of recovery and confidence," says Farmer. "The Dow is emitting a signal that sentiment is on the rise."

The Dow's long reputation for reflecting the national mood bodes well, he says.

"The Dow provides historical touchstones," says Farmer. "When Americans hear the number of points the Dow is up or down, their minds immediately translate that. The 14,000 number has a reference quality to it, and has enormous value in itself."

Since its last high on Oct. 9, 2007, the Dow has been powered higher by Home Depot, up 99%, IBM, up 73%, and McDonald's, up 67%.

One potential benefit of the Dow's sharp climb and rising popularity is that investors who have been sitting out the rally, either in cash or bonds, might start funneling more of that so-called safe money back into stocks, Moroney says.

"If we can bust out to a new high, it will add to the pain trade for those people who are underinvested in stocks," Moroney says.

The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at 14.5 times its trailing four-quarter earnings, a slightly cheaper price-to-earnings ratio than at its top in 2007.

Another plus: Investors are far less exuberant than they were in 2007, when stocks and real estate were flying high despite the fact that financial markets were quietly moving toward their worst crisis since the Great Depression.

The so-called Dow Theory is also sending a bullish signal. In short, when both the Dow Jones industrial average, which consists of stocks in companies that make stuff like computers and heavy earth-moving equipment, and the Dow Transportation average, which is filled with companies that move goods via railroads, ships and trucks, are both in a major uptrend -- which they are now -- it suggests the market is in bull-market mode.

While a correction can't be ruled out, the Dow's five-year high suggests it is decision time for investors.

Moroney says stocks offer a better alternative than bonds and cash.

"You can't focus on the fact that you missed the rally," Moroney says. "The fact that the Dow was at 6547 in early 2009 is not relevant. The question is, what do you want to do today?"

(c) Copyright 2013 USA TODAY, a division of Gannett Co. Inc.

Source: Copyright USA TODAY 2013

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