Dow hits record high as markets are undaunted by tepid economic growth, political gridlock

The benchmark Dow Jones industrial average reached an all-time high Tuesday, underscoring the contrast between corporate America’s rapid recovery since the financial crisis and the rest of the country’s ongoing struggle to regain its footing.

More than four years later, the crisis seems a distant memory for a number of big U.S. companies that are reporting record profits, even though many Americans remain jobless, wages have stagnated and Washington remains paralyzed in the face of the country’s tepid economic growth.

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Dow hits new high despite country's economic struggles.
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Dow hits new high despite country's economic struggles.

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At closing, the Dow was up 125.95 points, or 0.89 percent, to 14,253.77, breezing past both the intraday and closing records that were set in October 2007, just before Wall Street nearly imploded and dealt a serious blow to the U.S. economy.

It was also notable that after days of flirting with the all-time high, the Dow surged past its record largely because of news from China, where leaders said they would maintain a growth target of 7.5 percent this year and pledged to plow more money into the country’s economy. By contrast, forecasters expect the U.S. economy to grow just over 2 percent, with some warning that the across-the-board budget cuts known as the sequester could further dampen growth.

As companies rely more on earnings overseas, their fortunes have become more disconnected from the state of the U.S. economy. With the United States and Europe still seeing slow growth, many investors for the first time are expecting still-developing countries such as China to pull the rest of the world out of its economic funk.

The Dow, this country’s most famous index, tracks the stock prices of 30 multinationals, including iconic companies such as IBM, General Electric and JPMorgan Chase.

IBM, which currently carries the most weight in calculating the Dow Jones average, has seen its stock rise more than 80 percent in the past five years. More than half the company’s profits in 2011 came from overseas.

Even a company such as Hewlett-Packard, which is also on the index and has struggled in recent years, has seen its shares jump more than 40 percent this year.

The Dow’s record high confirmed that the markets have remained unfazed in the past year by the ongoing political paralysis in Washington. As lawmakers and President Obama lurch from one fiscal deadline to the next — from the debt-ceiling standoff in 2011 to the “fiscal cliff” to the steep budget cuts triggered last week — the markets have soldiered on with hardly a bump.

“The stock market and the American public are looking at the political theater with a jaundiced eye,” Ted Weisberg said from the New York Stock Exchange, where he has been a trader on the floor for more than four decades.

The markets hardly reacted Friday, when severe domestic and defense cuts started taking effect. The Dow rose 0.25 percent that day. A popular index for gauging fear in the markets, the CBOE Volatility Index, or the VIX, dropped nearly 1 percent.

“My sense is that our president and the White House are crying wolf,” Weisberg said of Obama’s warnings about the sequester last week.

Yu-Dee Chang, chief trader at Ace Investment Strategists in Vienna, Va., said the impact of the sequester is being felt more strongly in Washington than on Wall Street. Investors have been less worried about the cuts, which may be dramatic but still represent a tiny sliver of the national deficit.

But Wall Street still takes some of its cues from Washington.

In the days building up to the fiscal cliff at the end of last year, the markets were sanguine. But when a compromise was reached on New Year’s Day, the Dow surged more than 308 points, or 2.35 percent. The Standard & Poor’s 500-stck index jumped 36.25 points, or 2.54 percent.

More importantly, stock prices have been boosted by the Federal Reserve’s massive stimulus program, which has pushed down long- and short-term interest rates. The low rates have encouraged investors to seek out higher returns in the stock market.

“The market has the Fed behind its back,” Chang said. “Everyone is still looking for that yield. . . . That’s why the Fed strategy is working.” 

Fed Vice Chair Janet Yellen signaled Monday that the Fed would be continuing its $85 billion monthly bond-buying program.

On Tuesday, Cisco, United Technologies and Boeing led the way among the Dow 30 with the biggest stock price gains; all three rose more than 2 percent.

Another oft-cited benchmark for the market, the S&P 500, is also approaching its record. The S&P jumped 14.59 points, or roughly 1 percent, to 1539.79 on Tuesday, about 2 percent shy of its intraday record of 1576.09. Like the Dow’s, that high was also set Oct. 11, 2007.

The Dow’s previous intraday-trading nominal high was 14,198.10; the closing record was 14,164.53. Adjusted for inflation, the Dow is still about 10 percent off the 2007 high.

Nevertheless, the market has shown a remarkable turnaround since the crisis, at least compared with other measures, such as the country’s economic growth and joblessness figures.

People eyeing their retirement portfolios may be cheering the market’s return to pre-recession levels. But how much longer can the good times last?

Ed Easterling, founder and president of investment firm Crestmont Holdings, said stocks are at a point that is “about as good as they can get, absent a bubble.”

“It’s time to be careful,” he said.

That said, there is history pointing to a likely bull market this year, according to a note by Sam Stovall, chief equity strategist for S&P Capital IQ. Of the 26 times since 1945 that the S&P rose in price in both January and February, the index, including dividends, has been positive for the calendar year every time.

Ylan Q. Mui contributed to this report.

 
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