Does bull market have legs above Dow 13,000?

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Though not quite as impressive as the late 1990s run that saw stock prices triple in five years, the bull market that pushed the Dow Jones industrial average above the 13,000 mark Wednesday is one of most impressive in years. The question many investors are now asking is: Does this bull still have legs?

The Dow broke through its latest milestone in convincing fashion, gaining more than 135 points on the strength of decent economic data and solid earnings from Boeing and other blue chips.

“We are definitely in a bull market here," said David Straus, a portfolio manager with Johnston Lemon Inc. in Washington. "We had a lot of hesitation at the round number of 13,000, but then it went through and we attracted some volume."

The market's best known indicator has advanced in 17 of the last 19 trading sessions, gaining more than 6 percent in that four-week span.

The fuel that has pushed the market to new highs is one of the market's most potent propellants: corporate earnings. Profits of big U.S. companies jumped 21.4 percent last year on top of a 12.5 percent gain in 2005, according to the Commerce Department. Since the middle of 2003, the companies in the S&P 500 index have been on a red-hot earnings streak.

Ironically, the market's latest milestone comes just as earnings growth is slowing.

"We’re coming off a fabulous and historically record-setting run of 14 consecutive quarters of double-digit growth,” said Robert Keiser, who tracks corporate profits as a research analyst at Thomson Financial. “But it looks like that streak will come to an end with the first quarter of 2007.”

With nearly half of S&P 500 companies reporting, Thomson estimates overall first-quarter earnings growth of about 7 percent.

That is better than the 6 percent analysts had expected when earnings season began this month, although estimates already had been sharply reduced from an overall growth rate of 9 percent earlier in the year, partly because of problems stemming from the slumping housing market.

So with earnings beating reduced expectation, the market has rolled on.

It took less than five months for the Dow to go from the 12,000 milestone to 13,000, compared with the seven years it took for the Dow to traverse the distance from 11,000 to 12,000.

From its bear market low of 7,286 in October 2002, the Dow has surged nearly 80 percent, far surpassing its January 2000 bull-market peak of 11,723. The broader S&P 500 index has posted similar gains, though it still remains about 2 percent below its all-time, Internet-bubble high of 1,520 reached in September 2000.

Of course some companies and sectors have performed better than others.

“I think you are going to see things like materials, consumer discretionary (product makers), they are going to continue to be on a decelerating earnings path,” said Scott Wren, senior equity strategist at A.G. Edwards in St Louis.  “(But) things like health care and (consumer) staples are very steady. They have been so far, and I think you will see that the rest of the year.”

It’s that outlook for future earnings that will determine whether the bulls continue to move stock prices higher. And the current consensus among Wall Street analysts is fairly upbeat: growth in corporate profits is expected to rebound to 12 percent by the fourth quarter of this year.

But the optimism is not universal. The economy posted a respectable 2.5 percent growth rate in the fourth quarter of 2006, but the ongoing housing slump and continued worries about rising foreclosures and mortgage default have raised the risk of a slowdown later this year.

And though recent data on inflation have been encouraging, it is still higher that the Federal Reserve's “comfort level” — which reduces the odds that interest rates will be coming down any time soon. Federal Reserve Gov. Frederic Mishkin said in a speech last week that it may take a couple of years for inflation to ease to levels the Fed is comfortable with.

No matter how well the economy holds up, bull markets eventually run out of steam — or least need to take a breather. Some market watchers point to the Dow’s February pullback — a 600-point air pocket that sent the bulls scrambling — as a sign that the bumpy ride for investors isn’t over.

“We have been in a bull market for well over four years now,” said Randy Frederick, director of derivatives at Charles Schwab. “There's just not a lot of new money out there to be invested in this market. When the new money runs out, the market stops going up.”

But the risk of a major pullback seems lower today than it was in the late '90s, when the price  investors paid for each dollar of corporate profits jumped well above historical norms. Based on analysts’ profit estimates for the next four quarters, stocks in the S&P 500 are currently trading at about 15 times earnings, according to Keiser.

That price-to-earnings ratio makes stocks look cheap when compared to the 10-year average — which includes the huge premiums paid in the dot-com boom. Based on the 20-year average, stock prices are right in line with historical norms, according to Keiser.

“So the market is priced fairly — to slightly cheaply,” he said.