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Dow 11,000: It's been a long time coming

The Dow's first close above 11,000 in nearly five years should give investors a bit of a psychological boost, but will it last?
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There was a time — and not that long ago — when the stock market cleared new milestones easily and often.

Stocks surged, soared and sailed past hurdle after hurdle: Dow 9,000. Dow 10,000. Nasdaq 4,000. Nasdaq 5,000.

Those nice round numbers were meaningless in themselves but “psychologically important,” we were told, reflecting investor’s growing confidence in the economy and the outlook for corporate profits.

And they certainly made a convenient shorthand for financial journalists eager — some would say overeager — to tell the story of exponentially rising markets.

But the numbers that seemed so important on the way up in the late 1990s were nothing short of devastating on the way down a few years later.

And as for the media, let’s just say it’s been a long time since the market offered us any of those pretty round numbers.

Until now.

On Monday the Dow finally closed above the 11,000 level for the first time in more than four years, clawing its way back to a level last seen before the terrorist attacks of 9/11, before the war in Iraq and before the spate of corporate scandals that began with the collapse of Enron.

The 11,000 mark — still shy of  the Dow’s all-time high 11,722.98 — has seemed all but impenetrable in recent months. Time and again Wall Street’s best-known indicator has approached the 11,000 glass ceiling and even crossed it briefly, only to retreat by the close of the session, leaving the broader stock market with limited gains.

But after a disappointing December, the stock market has opened the new year with a convincing rally. The 30-stock Dow has advanced every session so far this year, notching an overall gain of 2.7 percent.

Market analysts say the new-year rally was triggered by the release of Federal Reserve meeting minutes indicating policy-makers are preparing to halt their 18-month-old rate-hike campaign.  Almost as soon as the minutes were released the afternoon of Jan. 3, the year’s first trading day, “The market took off, and we haven’t looked back since,” said Alec Young, equity market strategist at Standard and Poor’s.

“Fedspeak is usually very murky,” he said. “This time they went as far as they ever do” in signaling the intentions of policy-makers.

In the minutes of the Dec. 13 meeting, the Fed said “the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large.”

Friday’s employment report, which was weaker than expected, was taken as confirmation that the Fed will not have to raise rates too aggressively to rein in growth and stay ahead of inflation, Young said. “One of the reasons we’re positive on U.S. stocks in 2006 is because of an emerging  visibility into the end of the Fed’s tightening,” he said. “Uncertainty about the Fed tightening was the biggest cloud hanging over the market.”

Young’s view is echoed by many other market analysts, including Alan Skrainka, chief market strategist for Edward Jones. “We’re very upbeat about 2006 because two big worries have the potential to go away,” he said. In addition to the Fed moving to the sidelines, Skrainka expects energy prices to stabilize or even go down a bit, which he said should be enough to boost investor confidence.

But that kind of groupthink makes some contrarians uneasy.

“It makes me nervous when you get that kind of foolish consistency,” said Jeffrey Saut, chief market strategist for Raymond James. He said overextended consumers are “at a tipping point” and businesses are facing growing pressure to bring pension and health-care liabilities onto their balance sheets.

“I just think it’s a mistake to have too optimistic a view of the markets or a too-hardened pessimistic view of the markets,” he said. Saut said he is bullish only about selected sectors of the market, including energy, metals, natural resources and some technology shares.

The consensus among analysts is that the Fed will raise short-term interest rates another quarter-percentage point at Chairman Alan Greenspan’s final meeting on Jan. 31, then probably make one last quarter-point move March 28, the first meeting to be led by incoming Chairman Ben Bernanke.

Young said he expects the S&P 500 and the Dow to continue climbing this year, perhaps adding another 6 percent by the end of the year, for a total 9 percent gain on the year.

Hugh Johnson, chairman of Johnson Illington Advisors, said he has been surprised by the strength of the market’s rally this year, especially after Friday’s employment report included some evidence of stronger-then-expected wage pressure. Rising wages could translate into the kind of broad inflation that the Fed is generally determined to stamp out through higher interest rates.

But he said any concerns about rising inflation and a more-aggressive fed are offset by the positive news about steadily rising employment and corporate profits.

“This looks like a very normal bull market, where the economy and profits are expanding and the fed is raising short-term interest rates,” he said. At the same time the technology sector is beginning to generate the kind of excitement not seen in years, especially with the rapid growth of Google and the controversial call of an analyst who predicted the search-company’s stock will rise to $600 this year.

And many investors also are encouraged by the “January effect,” in which prognosticators claim to be able to foretell the outcome of the year based on the first few days of trading. According to the Stock Trader’s Almanac, over the past 55 years of trading when the market is up after the first five sessions of the year, it ends the year with a gain about 88 percent of the time.

Monday’s close above 11,000 will continue that kind of momentum, which, yes, is very much psychological.

“11,000 is important but not for all the reasons many think,” said Johnson. “It doesn’t signal something different. It does mean there will be some attention paid to the market.  It does stir investor confidence. It does stir those speculative spirits.”