The Dow Jones industrial average sailed to a record high on Tuesday, surpassing its pre-recession peak even as the economic recovery remains painfully slow for millions of Americans.
The Dow, perhaps the best known measure of the stock market, closed at 14,253.77 after a 126-point surge that drove the blue chip index past the previous record of 14,164.53 reached in October 2007. Some analysts likened the new milestone to waking from a bad dream: Four years ago on March 9, the Dow plummeted to a low of 6,547.
“It seemed in early 2009 that the world was ending, and fortunately, it did not, it began to recover,” said James J. Angel, a professor of finance at Georgetown University. “The market has basically done a five-year Rip Van Winkle, and right now people have the same expectations for the future that they had five years ago at the peak.”
The Dow, which measures the performance of 30 US companies, including Walmart, Coca-Cola, and General Electric, recovered relatively quickly despite the depth and duration of the last recession.
After the dot-com crash and the eight-month recession that followed in 2001, it took about seven years for stocks to return to pre-recession highs. It took more than 25 years for the Dow to recover from its losses after the 1929 stock market crash that led to the Great Depression.
Yet it took just five years and five months for the Dow to recover from the Great Recession, which lasted 18 months and was the longest since the Depression.
When the Dow hit its previous peak in the fall of 2007, the US economy was about two months away from the recession. The housing market was sliding and the first signs of the financial crisis were emerging, but most investors and analysts believed — or at least hoped — the US economy would avoid a serious downturn.
They were wrong, of course, and many Americans today may not feel like celebrating Wall Street’s comeback. Unemployment has remained persistently high at 7.9 percent in January, compared with 4.7 percent in October 2007.
The US median home price, $173,600 in February, is still 16 percent below the $206,700 median in October 2007, according to the National Association of Realtors. Overall economic growth is also a small fraction of what it was in 2007 before the recession.
Economists said a variety of factors have driven Wall Street stock prices higher, including an improving economy, strong corporate profits, and low interest rates. The unusual and controversial policy steps taken by the Federal Reserve to stimulate the economy in recent years have played a key role they said.
The central bank has bought hundreds of billions of dollars of Treasury and mortgage securities to pump money into the economy and push long-term interest rates, such as mortgages, to record lows. The Fed has also cut its benchmark short-term rate to near zero.
Sung Won Sohn, an economics and business professor at California State University, said the Federal Reserve made it cheaper for people and institutions to borrow. But that money has typically been reinvested in stocks because there are few places that offer better returns.
But just as the Federal Reserve’s actions have given the stock market a boost, when policy makers begin to unwind those stimulus policies and raise interest rates, it could cause stock values to drop, Sohn said.
“I worry that there’s some bubble here going on based on the Federal Reserve’s actions,” he said. “The underlying economy does not justify the level of the stock market we’re enjoying today. “If chairman [Ben] Bernanke even thinks about raising interest rates, we could see a significant correction.”
The Dow’s gains also come as Congress undertakes $85 billion in projected spending cuts to defense and other spending. Sohn said Wall Street may welcome the cuts, viewing them as a way to reduce the deficit and improve the nation’s overall economic health, also of benefit to the stock market.
Investors do not appear to be threatened by the federal cutbacks because they view the economy as improving, said Nariman Behravesh, chief economist at IHS Global Insight, a Lexington forecasting firm. Private companies have added more than 600,000 jobs over the past three months, according to the Labor Department.
Behravesh said the nation is coming out of a period of sluggish growth and Wall Street understands that “these shenanigans in Washington aren’t going to kill the recovery.” Consumers have “shrugged off the payroll hike” that is taking a small bite from paychecks, and the housing market, while not at pre-recession levels, is strengthening as sales accelerate and prices begin to rise.Continued...