Analysts credit strong earnings for market ascendance

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A lackluster recovery, chronically high unemployment and a dysfunctional federal government failed to thwart Wall Street from sprinting past its historic high Tuesday, when the Dow Jones industrial average topped a market peak last achieved more than five years ago.

The widely watched index of 30 stocks closed at 14,253.77, up 125.95, or less than 1 percent. That eclipsed its previous record high close of 14,164.53 set Oct. 9, 2007.

The S&P 500, a broader index that professional investors say is a better indicator of market health, also rose less than 1 percent, stopping short of its all-time high. It finished at 1,539.79, up 14.59. That put it within reach of its record close of 1,565.15, also achieved Oct. 9, 2007.

Meanwhile, the Nasdaq composite index rose 1.3 percent to close at 3,224.13, up 42.10.

Market analysts said the long, slow climb back was fueled by a number of factors, including strong corporate earnings and balance sheets. Lawrence Creatura, a portfolio manager for Federated Investors, said fourth-quarter earnings reported by companies have been better than expected.

PG graphic: The Dow Jones Industrial Average
(Click image for larger version)

"That provided the spark that ignited the tinder underneath the stock market," Mr. Creatura said.

While the unemployment rate and other economic data have not bounced back as far or as fast, those numbers are improving.

"Everything is sort of headed in the right direction," said Matt Yanni of Yanni & Associates in Franklin Park. "It just doesn't seem like there's a high risk of a recession coming in the future."

Analysts said the Dow's recovery would have not been possible without the Federal Reserve's policy of keeping interest rates at historically low levels. That has driven investors looking for heftier returns into the stock market despite lingering memories of Wall Street's collapse in late 2008.

"Never have I seen a market trade less on the fundamentals than I have today. It's totally trading on liquidity from the Fed," said Christopher Wiles of Rockhaven Capital Management in Mt. Lebanon. "We're in an inflating world."

During the 65-month period between the Dow's previous high and Tuesday, the U.S. economy descended into the Great Recession. The housing bubble burst, Lehman Bros. and Bear Stearns collapsed, and the government rescued insurer AIG and the auto industry.

In December 2007, when economists say the recession officially began, the unemployment rate was 4.7 percent and the U.S. economy was growing at an annual rate of 2.5 percent.

Today, unemployment stands at 7.9 percent and many forecasts call for the economy to grow less than 2 percent this year.

"I don't know that we can get below 5 percent [unemployment] again," said Geoffrey Gerber of TWIN Capital Management in Peters. "Structurally, the kinds of jobs that were there then aren't around anymore."

Mr. Gerber said the prices of only two types of assets have risen more than 3 percent annually over the last 65 months: gold, which increased 16.3 percent, and oil, which rose 3.2 percent. Including dividends, the Dow returned about 3 percent annually over the period while the S&P 500 generated annualized returns of approximately 2 percent.

Compare that to the best performing investment in Allegheny County's $645 million pension fund over the last three years: a fund that buys and sells the rights to death benefits paid by life insurance policies covering wealthy individuals.

The fund, organized by Corry Capital Advisors of Pittsburgh, generated a three-year return of 34 percent through the end of October, according to the fund's most recent report. Founder William Corry said the firm manages a series of life settlement funds that has produced annualized returns of 15.1 percent, after expenses, since October 2007.

Despite the stock market reaching a new high, many analysts do not expect individual investors, who have largely sat out the rally, to rush in off the sidelines. Too many are too nervous about what the market collapse did to them.

"There's no equity enthusiasm whatever. There's been no buy-in from the retail side," said Cory Krebs of Cookson, Peirce & Co., Downtown.

Some of that can be attributed to market volatility. Of the 40 biggest daily price swings on the New York Stock Exchange since 1966, 29 have occurred since the collapse of Lehman Bros. in September 2008, Mr. Gerber said.

"Daily volatility has been much higher," he said. "I think investors have a right to think about markets differently."

Some analysts believe investor caution, the amount of money on the sidelines and an improving economy could keep the market moving higher.

"The impetus will be toward the upside," Mr. Wiles said.

Mr. Gerber is not so sure. He said when Wall Street indexes fully recovered from the tech stock bubble in October 2006, they moved higher for only one year before heading south. He is concerned that bad news on the economic front or other developments could derail this rally.

"Not to be the bear here, but I'm not sure it's going to be long in the tooth," he said.

Mr. Creatura said strong corporate earnings in the face of considerable headwinds got the market to where it is today and will determine its future course. The market is not advancing "because investors are frothing to buy stocks," he said. "They're not. It's because earnings are up."


In China, leaders plan a 10.7 percent increase in military spending and set a target for the economy to grow 7.5 percent this year. Page A-4

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Len Boselovic: or 412-263-1941.


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