NEW YORK - The Dow Jones industrial average, an index of 30 U.S. stocks and a gauge of financial markets, closed at a record high of 14,253 on Tuesday. The Dow has more than doubled since hitting a 12-year low in March 2009.
How have stocks managed to recover and where is the market is headed?
Q: Stocks are at a record? How did that happen?
A: Stocks have been rallying since bottoming out in March 2009 during the Great Recession. Companies slashed costs in the depths of the recession, and that helped earnings increase when the economy began to recover. More than $2 trillion of stimulus from the Federal Reserve has also underpinned the rally by keeping long-term interest rates low. As well as helping the housing market recover, low interest rates encourage companies to borrow and invest.
Q: So why are stocks at a record when the economy still feels bad?
A: Stock markets look ahead. And investors are optimistic that the housing and job markets are recovering. Also, all the big issues that investors worried about last year seem to have sorted themselves out. Europe has stabilized after flirting with a meltdown last summer. Uncertainty about the election is over, and the Chinese economy seems to have stabilized.
Q: And what have bonds been doing?
A: For the most part, the rally in stocks has been accompanied by a rally in bonds as the Fed has pledged to keep rates low and the stimulus flowing until the U.S. economy is fully recovered. Yields, which move inversely to bond prices, have been edging up recently though, suggesting that the rally may be over.
Q: Does the stock rally still have legs?
A: That depends on who you talk to. The bulls say that, based on many valuations such as stock prices compared to earnings. Many equities are cheap compared to historical averages and are far more attractive investments than bonds, which are trading close to record highs. The bears will tell you that worries about growth in Europe and China still linger and bickering in Washington could still derail the rally. Also, economic growth, while steady, is nothing to get excited about.
Q: How much would I have made if I'd gotten in at the bottom?
A: An investor who put $1,000 into the stock market on March 9, 2009, the day the Dow bottomed out after the Great Recession, would now have $2,406. That's a total return of 140.6 percent, including stock gains and dividends.
DOW, THEN AND NOW
The last time the Dow hit a record, George W. Bush still had another year as president, Apple had just sold its first iPhone, and Lehman Brothers was still in business.
But unemployment was also 4.7 percent versus 7.9 percent today, a reminder that stock gains have proved no elixir for the economy.
Still, the Dow high is another sign that the nation is slowly healing after the worst recession since the 1930s. It comes as car sales are at a five-year high, home prices are rising, and U.S. companies continue to report big profits.
The stock gains have helped retirement and brokerage accounts held by many Americans recover. That, in turn, has helped push U.S. household wealth nearly back to its peak before the recession, though many in the middle class are still deep in the hole. Most middle-class wealth is tied up in home values, which are still a third below their peak.
Good economic news Tuesday helped lift stocks. Retail sales in the 17 European countries that use the euro rose faster than expected, China's government said it would support ambitious growth targets, and a report showed U.S. service companies grew last month at their fastest pace in a year.
The Associated Press
THE 30 STOCKS
The Dow Jones industrial average closed at 14,253.77 on Tuesday, 0.6 percent higher than its previous record close on Oct. 9, 2007. Here's a snapshot of how the 30 stocks within the benchmark index have performed since then.
Home Depot posted the biggest percentage jump over that time, and much of that has come in the last year on signs that the housing market is improving. IBM stock also climbed steadily along with its profits.
• Home Depot, up 108.5 percent
• IBM, up 74.6 percent
• McDonald's, up 67 percent
• WalMart Stores, up 63.1 percent
• Walt Disney, up 59.3 percent
• Travelers, up 52.8 percent
• Coca-Cola, up 33.7 percent
• Chevron, up 27.1 percent
• Johnson & Johnson, up 17.2 percent
• Verizon Communications, up 12.4 percent
• United Technologies, up 12.1 percent
• UnitedHealth Group, up 10.3 percent
• Pfizer, up 9.9 percent
• Caterpillar, up 9.3 percent
• 3M, up 9.2 percent
• Procter & Gamble, up 8.4 percent
• JPMorgan Chase, up 4 percent
• American Express, up 2.6 percent
• DuPont, down 1.6 percent
• Exxon Mobil, down 3.3 percent
• Microsoft, down 5.8 percent
• AT&T, down 12.8 percent
• Intel, down 16.8 percent
• Merck, down 19.4 percent
• Boeing, down 22.5 percent
• Cisco Systems, down 35.9 percent
• General Electric, down 43.9 percent
• Hewlett-Packard, down 61.2 percent
• Bank of America, down 78 percent
• Alcoa, down 79 percent
Sources: FactSet; The Associated Press