A Wall Street rally that few expected has carried the Dow Jones index above 13,000 for the first time in nearly four years, leading some to predict an extended bull run that could lift stocks to record levels.
Stocks have been driven higher by signs of an improving economy, including declining unemployment, rising consumer confidence and strong corporate earnings.
The sheer steepness of the rise — the Dow closed at 13,005.12, up about 6.5 percent since Jan. 1, while the tech-heavy Nasdaq has soared nearly 15 percent — has triggered warnings that a correction may be on the way. Rising oil prices and global political tensions could also put an early end to Wall Street’s ongoing New Year’s party.
But for now, the bulls are in command — and they are building their case for Dow 14,000 and beyond.
“I think there’s a good chance that by the end of this year the Dow will break its all-time high,” said Jeremy Siegel, a market historian at the University of Pennsylvania’s Wharton business school, author of the influential book “Stocks for the Long Run.”
Siegel’s optimism is driven partly by market history, which suggests that stocks are overdue for a lengthy advance. Long periods of sluggish performance often have been followed by multiyear upturns.
For example, the Standard & Poor’s 500 index of blue-chip stocks — a broader index than the more iconic Dow Jones industrial average of 30 stocks — finished flat in 2011, despite a big jump in corporate earnings. So far this year, the S&P 500 is up 9 percent.
Optimists are also betting that individual investors who grew wary of stocks in recent years will move back in because of disappointing, if theoretically safer, returns in bond funds. High-quality bonds are near generational lows and cash accounts pay next to nothing.
Chi Nguyen, a 36-year-old real estate agent in Monarch Beach, Calif., said she yanked about 70 percent of her portfolio out of the market 18 months ago because it was too unpredictable. She’s since returned about one-third of that to the stock market and is looking to funnel in more money.
“It’s amazing — everything I’m seeing is pointing toward guarded optimism,” Nguyen said. “Finally, after the past four years, things are looking up.”
Individuals have pulled a net $400 billion out of stock mutual funds in the last four years, according to the Investment Company Institute. They have removed an additional $4 billion this year, though money has started to trickle back recently. In the past six weeks, investors have added a net $5 billion.
Though there’s nothing magical about 13,000 itself, hitting such milestones is important psychologically because they tend to draw outsized attention from the public. Reaching 13,000 also is a symbol of the recovery in both the economy and the stock market from the 2008 financial crisis.
“If we hit it toward the end of the year it would be five years of backing and filling to get back to the old high,” said Bruce Simon, chief investment officer at City National Bank in Los Angeles. “From a psychological standpoint it would close the books on the difficult economic conditions we’ve been facing from the 2008-2009 recession and the sluggish economy since then.”
Even with these gains, however, many investors — including the millions of workers dutifully pumping money into 401(k) retirement plans — have made very little progress in the stock market over the last decade. Many remain hesitant to get back in.
“The psychological fallout from what happened in 2008 and 2009 is still very present for a lot of individual investors,” Simon said. “I don’t know how long it’s going to take or how high the stock market has to go for them to get off the sidelines.”
Many Wall Street pros remain concerned about risks that could send the market tumbling again: higher energy prices, the European debt crisis and more geopolitical worries in the Middle East. Also, the growth rate in corporate earnings is predicted to slow noticeably this quarter.
“There’s certainly no shortage of things to worry about,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.
The stock market started off in similarly strong fashion a year ago only to be upended midyear by the European debt crisis and the U.S. debt-ceiling fight. Investors bailed out of the markets on fears that both problems would grow and potentially trigger another global financial meltdown.
This year, however, investors have regained confidence. Like the Dow, Europe’s biggest markets are all sharply higher since the start of the year. In the U.S., bulls are convinced that history is on their side as the Dow takes aim at its October 2007 record of 14,164.53.
Largely because of the punishing bear market from late 2007 to early 2009, the market’s average return in the past five years has fallen to an anemic 0.8 percent, according to Siegel. That’s way off the 9.5 percent annual average since 1926.
In the past 85 years, there have been a dozen periods in which the 10-year average annual return of the S&P 500 has fallen below 4 percent, according to Morningstar Inc. The next decade has averaged an impressive 12.5 percent a year.
Bulls say individual investors will steadily return to stocks if the market keeps rising.
“We’re getting close to changing the national conversation,” said Jim Paulsen, chief investment strategist of Wells Capital Management in Minneapolis.
“For three years, the talk among investors has been ‘Are you cautious enough?’ and ‘Are you prepared for the next correction?’ ” Paulsen said. “As we get closer to new all-time highs, that’ll change to ‘Are you missing out?’ ”
Source: MCT Information Services