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Dow closes at all-time high, tops 2007 record 

Riding a wave of optimism, the Dow Jones industrial average closed Tuesday above levels not seen since before the financial crisis and before the Great Recession.

It was a journey more than five years in the making, as investors slowly and then with greater urgency over that time, plowed money into stocks, mainly because there were few other places in the economy in which to make more money.

The blue-chip index, the best known and most widely followed measure of stock prices, rose 125.95 points, or 0.89 percent, to end at 14,253.77, led by Boeing and United Technologies. The Dow Jones Transportation Average also touched a record high.

More than 100 companies ranging from retailers to Internet giants, food makers and industrial companies rose to annual, multiyear or all-time highs. Since the Dow's last all-time high in 2007, Home Depot and IBM have been the biggest gainers, while Alcoa and Bank of America have been the worst performers.

So far, the Dow is up nearly 9 percent in 2013, surpassing the 7.3 percent gain for all of 2012.

The broader S&P 500 index closed up 14.59 points, or .96 percent, to 1,539.79. The tech-laden Nasdaq jumped 42.10 points, or 1.32 percent, to 3,224.13.

Stocks got a big boost Tuesday from upbeat economic data from Europe. China helped too, pledging to meet its growth targets.

But the main fuel for the record-setting climb has been near-zero interest rates from the Federal Reserve, which have spurred the housing market, but also made it difficult to make money buying bonds or holding money in savings accounts.

But what does the new high mean for the economy?

"It's meaningful in the sense it obviously has a lot of media potential - it's likely to move stories about the stock market to the front page from the financial section," said investor Hugh Johnson. "From that point of view it is good news in that it tends to lift spirits or raise confidence. There is the wealth effect of the fact that when you start to lift confidence it leads to stronger consumer spending. From that point of view it will have positive feedback on the economy," he added.

In Johnson's view, the gridlock in the nation's capital is unlikely to bring the market down.

"The question it is going to raise - which this market has raised continuously - is how is it this market is doing so well in the face of meaningful spending cuts coming out of Washington with the sequester? The message of the markets is although the sequester is likely to impact gross domestic product, it is not likely to end the current stock market business cycle, or the bull market expansion. It is not likely to interrupt the current cycle."

(Read More: Cramer: Near All-Time Highs, Should You Buy?)

On the economic front, the Institute for Supply Management's (ISM) non-manufacturing index, which tracks monthly changes in the services sector, said the pace of growth in the vast U.S. services sector accelerated to its fastest pace in a year in February, helped by a rise in new orders and demand for exports.

ISM said its services index rose to 56 from 55.2 in January, exceeding economists' forecasts for 55. It was the highest level since February 2012. A reading above 50 indicates expansion in the sector.

The new orders index jumped to 58.2 from 54.4, while orders for exports rose to their highest level since May 2007 with that gauge at 60.5, up from January's 55.5.

"This was no question a positive number," said Michael Woolfolk, senior currency strategist at BNY Mellon. "It reflects improvement in reinforces the view that the economy continues to improve and should contribute to gains that have driven the stock market to a new record."

European shares were boosted by the news that euro zone finance ministers have struck an agreement to bail out Cyprus by the end of March, although they have yet to work out the details of the 17 billion euro ($22.1 billion) financial aid package.

Shares in mainland China recovered 2 percent after hitting a six-week closing low in the previous session, as outgoing Chinese Premier Wen Jiabao set out a reform plan at the National People's Congress in order to achieve a 2013 growth target of 7.5 percent.

(Read More: Why China's Property Market Is Getting Scary)

The Senate Budget Committee is meeting to discuss reducing the fiscal deficit by eliminating wasteful spending in the tax code.

"We are seeing money going into the asset class," said Shawn Matthews, CEO of Cantor Fitzgerald, but at some time investors can expect a "pause," he added.

House Speaker John Boehner said President Barack Obama and he had made no headway on a deal to avoid sequestration over the weekend. Meanwhile, House Republicans are expected to introduce a bill to extend government funding through September, to avoid a government shutdown at the end of the month.

While stocks so far have largely ignored sequester concerns, analysts say signs the cuts are beginning to impact the economy could eventually move markets.

On Monday afternoon, Stephen King, chief global economist at HSBC, said that the U.S. was living in "a fantasy world" over the impact sequestration would have on growth.

"If you look at the projections from the Congressional Budget Office, they assume that growth goes back to between four to five percent in real terms between 2014 and 2018. Their numbers suggest that the U.S. will post the fastest rate of productivity growth of any decade in the last 50 or 60 years," King told CNBC Europe. "Even allowing for the fact that there's some debt reduction, coming through sequestration, there's still a degree of wishful thinking with regard to the economy which probably isn't going to come true."

Information from The Associated Press was included in this report.