NEW YORK – The Dow Jones industrial average, an index of 30 U.S. stocks and a gauge of financial markets, closed at a record high of 14,253 on Tuesday. The Dow has more than doubled since hitting a 12-year low in March 2009. How have stocks managed to recover and where is the market is headed?
Question: Stocks are at a record. How did that happen?
Answer: Stocks have been rallying since bottoming out in March 2009 during the Great Recession. Companies slashed costs in the depths of the recession and that helped earnings increase when the economy began to recover. More than $2 trillion of stimulus from the Federal Reserve, has also underpinned the rally by keeping long-term interest rates low. As well as helping the housing market recover, low interest rates encourage companies to borrow and invest.
So why are stocks at a record when the economy still feels bad?
Stock markets look ahead. And investors are optimistic that the housing and job markets are recovering. Also, all the big issues that investors worried about last year seem to have sorted themselves out. Europe has stabilized after flirting with a meltdown last summer, uncertainty about the election is over and the Chinese economy seems to have stabilized.
And what have bonds been doing?
For the most part, the rally in stocks has been accompanied by a rally in bonds as the Fed has pledged to keep rates low and the stimulus flowing until the U.S. economy is fully recovered. Yields, which move inversely to bond prices, have been edging up recently though, suggesting that the rally may be over.
Does the rally still have legs?
That depends on whom you talk to. The bulls say that, based on many valuations such as stock prices compared to earnings, many equities are cheap compared with historical averages and are far more attractive investments than bonds which are trading close to record highs. The bears will tell you that worries about growth in Europe and China still linger and bickering in Washington could still derail the rally. Also, economic growth, while steady, is nothing to get excited about.
How much would I have made if I’d got in at the bottom?
An investor who put $1,000 into the stock market on March 9, 2009, the day Dow bottomed out after the Great Recession, would now have $2,406. That’s a total return of 140.6 percent, including stock gains and dividends.
What is the broader context of Tuesday’s rally?
The Dow is a rather narrow measure of the stock market, so it can provide a somewhat distorted picture of the market’s performance.
At its Tuesday close of 1,539.79 points, the much broader Standard & Poor’s 500 index was still off its nominal high of 1,565.15, also set in October 2007. After taking inflation into account, both indexes are down from their earlier highs in 2000.