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Dow continues to sizzle, topping 15,000 for the first time

Even amid extreme investor caution, stocks keep surging. Bulls say more new highs are likely the rest of the year, but others expect a 'sell in May' pullback.

May 07, 2013|By Andrew Tangel, Los Angeles Times

NEW YORK — Another day, another milestone on Wall Street.

The red-hot Dow Jones industrial average barreled past 15,000 to close Tuesday at its highest point in history. It marked the 16th record close for the blue-chip index this year and came just three months after it crossed 14,000 for the first time since the financial crisis.

Bulls say the market could keep hitting new highs the rest of the year. They predict that investors who turned their backs on equities after being stung by crushing losses in 2008 will have no choice but to move into stocks to make up for lost time.

"This market has a lot more room to run," said Doug Cote, chief investment strategist with ING Investment Management U.S. "There's still $7 trillion of cash on the sidelines. People are still very suspicious of this market."

One encouraging sign is that the current rally is different than the tech-fueled bull run of 2000 and the advance in 2006 and 2007 that preceded the financial crisis. The earlier rallies were fueled by surging optimism, which in the market's contrarian ways can foreshadow trouble.

The latest surge has been marked by extreme caution, with small investors largely unwilling to take on excessive risk.

The rally has been fueled by sectors regarded as defensive: utilities, healthcare and consumer staples. Investors also have been pouring money into companies that pay dividends, which has been one of the big reasons for the popularity of such stocks as Apple Inc., Wal-Mart Stores Inc. and Coca-Cola Co.

And investor demand for bonds remains intense, despite record-low yields. So far this year, nearly $85 billion has flowed into bond funds compared with $19 billion into domestic stock funds, according to the Investment Company Institute.

Sharon David, a business consultant from Santa Monica, is like a lot of investors who have been watching the markets push into unchartered territory. She sees the current market as a way for some investors to recoup all the money they lost after the financial crisis. However, she's still nervous about putting money into stocks.

"For the economy and for investors, this is a good thing because people can recover what they lost in the last seven years, and people lost a lot," she said.

Investors' skepticism hasn't held back the Dow or the broader Standard & Poor's 500 index.

The Dow has gained 130% since the financial crisis low of March 2009. It has risen a dizzying 14.9% in little more than fourth months and has soared 2,500 points since mid-November.

The S&P is up 14% for the year, while the technology-focused Nasdaq composite is up 12.5%.

On Tuesday, the Dow added 87.31 points, or 0.58%, to 15,056.20. The S&P 500 gained 8.46 points, or 0.52%, to 1,625.96. The Nasdaq rose 3.66 points, or 0.11%, to 3,396.63.

The records have come on growing hope that the global economy is on the mend and that the chance of the U.S. economy slipping back into recession is dimming. That theory hit home Friday when the U.S. government reported stronger-than-expected job growth, which sparked this week's surge.

But no policymaker has said the economy has made a complete recovery that would require the Federal Reserve and other central banks to rein in stimulus programs.

As growth in the United States and around the world stumbled in the years after the worst downturn since the Great Depression, central banks have taken aggressive steps to make money cheap to borrow. By lowering interest rates, the Fed and other central banks have made investing in bonds less attractive, luring investors into riskier assets such as stocks.

The real fear on Wall Street is when all of that will end.

"At some point, the Fed is going to be confronted with a decision," said Jack Ablin, chief investment officer at BMO Private Bank. "Do they continue to perpetuate higher equity prices in a quest for lowering the unemployment rate, or do they take their foot off the accelerator out of concern that they've created a bubble?"

The fate of the rally may depend too on how well companies rake in profits. Analysts measure how expensive stocks have become — and thus whether the market has rallied or fallen too far — by comparing prices of shares with their underlying companies' earnings.

Some analysts contend stocks are still reasonably priced — not cheap but not alarmingly expensive. They also believe that stocks are not approaching sky-high valuations seen before previous market peaks.

The research firm S&P Capital IQ argued in a recent report that stocks are fairly valued even though share prices lately have surged far faster than underlying corporate earnings.

"Market valuations are appealing but not compelling," Sam Stovall, the firm's chief equity strategist, wrote in the report.

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