Dow 14,000 and $75 Oil
It's often said that stocks like to climb a wall of worry. But forget climbing–this bull market is taking a high-speed elevator straight to the top.
The Dow Jones industrial average climbed Tuesday morning above the 14,000 threshold for the first time, thanks to good news on corporate earnings and inflation. While the benchmark index gave back some of its early gains and dipped back below 14,000, the fact remains that it took less than three months for the Dow to go from 13,000 to 14,000.
It took a full six months for the Dow to hit the 13,000 level in April and eight months to reach 12,000. Before that, it took more than two years to crack the 11,000 level. Of course, as the Dow gains ground, it's mathematically easier to hit these milestones. The difference between 13,000 and 14,000 is only 7.7 percent, while going from Dow 3000 to 4000 was a 33 percent leap.
But a 7.7 percent gain for the Dow would represent a solid full-year performance for stocks, by historic standards. Yet the Dow made that jump in less than three months and is up more than 12 percent for the year.
What's remarkable isn't that the market reached Dow 14,000 so quickly but that it surmounted considerable obstacles. Crude oil prices have topped $75 a barrel, trending higher in recent weeks. Corporate earnings growth is set to slow, though perhaps not as quickly as Wall Street analysts are predicting. The housing-market slowdown threatens to cool the broad economy. And then there's the meltdown in subprime mortgage loans, which is already slashing the value of subprime-related bonds and securities held by hedge funds, pension funds, banks, and insurance companies.
Yet Isaac Newton had it right: For every action, there's an equal and opposite reaction. In the case of rising oil prices, yes, they're certainly a point of concern. But the growing globalization of the world's economies means the United States is importing deflation in other goods, and that has kept the overall inflation rate low. Case in point: The producer price index, a key gauge of inflation at the wholesale level, fell 0.2 percent in June, the Labor Department reported Tuesday.
While corporate earnings are slowing, the acceleration in the global economy is expected to improve U.S.-based multinationals' sales abroad, says Alec Young, international equity strategist for Standard & Poor's. That should perk up corporate profits. And as housing prices cool, market interest rates have stayed low by historic standards, imparting stability to the real estate market.
As for the subprime mess, so far the continued flood of liquidity in the market because of low interest rates and cheap financing has shielded the overall economy.
Here are some other keys to success:
Increased market volatility. While rising volatility is often associated with greater risk, it "does not necessarily mean negative returns," says Richard Bernstein, chief investment strategist for Merrill Lynch. He added that "rising volatility means that the stock market will have bigger up days and bigger down days." Recently, those big up days have pushed the Dow ever higher.
The rotation from small stocks to large stocks. While it's true that the bull market in equities is nearly five years old, shares of blue-chip companies have lagged behind small stocks for much of this decade. Only over the past year or so have large stocks retaken market leadership. The Dow is a large-stock index, so don't be surprised if it moves higher as more and more investors fall back in love with blue chips.
The strong global economy. The stock market is always looking for a proverbial Goldilocks scenario, where the economy is growing just right–briskly but not so fast that it triggers inflation. The surprisingly strong global economy seems to be providing both conditions. The fact that the world economy is growing faster than the domestic economy might prop up the profits of U.S.-based multinationals. At the same time, along with foreign goods, the United States appears to be importing deflation from cheaper manufacturers like China and India. This is keeping inflation largely in check.
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