Breakthrough for the Dow
For Stock Average, Close Is First Above 11,000 Since Before 2001 Attacks

By Ben White
Washington Post Staff Writer
Tuesday, January 10, 2006

NEW YORK, Jan. 9 -- After months of hesitation, the Dow Jones industrial average finally broke through the 11,000 mark Monday, extending a New Year's rally that has sent all the major market indicators to four-year highs.

Money managers, traders and economists said the symbolism of piercing a level not seen since June 2001 could have a significant impact on investor confidence. More importantly, financial experts said that while irrational exuberance may have helped drive the Dow past 11,000 the last time around, the current rise appears more grounded in economic and market fundamentals. Analysts also said the current rally is based in part on anticipation that the Federal Reserve will stop raising interest rates at some point early this year and on continued high government spending.

The Dow closed at 11,011.90 Monday, up 52.59 points, or 0.5 percent.

Arthur Hogan, chief market analyst at Jeffries & Co., said closing above 11,000 could erase at least some of the skepticism that has weighed on stocks ever since the Internet bubble burst in 2000, destroying billions of dollars in investor wealth.

"Professional portfolio managers will tell you this means nothing," he said. "But for the 99 percent of us who are not professional managers, this is clearly a signal that the market has recovered and gotten back to a level that we knew long ago." Hogan said the 11,000 mark could encourage people to put money into U.S stocks and mutual funds rather than international markets, bonds, real estate or other investments. That could help keep the Dow above 11,000.

Several strategists warned that the market still faces significant potential hurdles. Among them are the threat of further oil price spikes, a rapidly weakening dollar and a dramatic collapse of housing prices, as well as major terrorist attacks or failures of several large hedge funds.

"Could this rally be stopped? Certainly it could," Hogan said. "Any one of a number of headwinds could do it. But right now I would say the underpinnings are more solid that the last time we looked at" Dow 11,000.

Jeffrey Kleintop, chief strategist at PNC Advisors, said the last time the Dow was this high, companies in the blue-chip average traded at much higher prices when compared with their quarterly earnings. Companies in the Standard & Poor's 500-stock index now have about $772 billion in cash on their balance sheets, compared with about $422 billion in 2001, Thomson Financial said.

Couple that with steady economic growth, tame inflation and continued low interest rates, market strategists say, and this level could hold. "Profit margins are much better. Earnings are much higher. Valuations are much better," Kleintop said. "You've got to feel better about this Dow 11,000 than the last one."

For much of the afternoon it appeared as though the Dow would once again swoon in the face of 11,000, as it did several times last year. The blue-chip average first crossed the threshold in the early afternoon, only to quickly sink back. But buyers once again emerged, driving the Dow above 11,000 shortly before the closing bell. The Dow is now 6 percent below its all-time high of 11,722.98, reached on Jan. 14, 2000.

General Motors, among the worst performers in the Dow last year, drove the average above the 11,000 mark. Shares in the troubled automaker rose $1.61, or 7.7 percent, to close at $22.41 on Monday after chief executive G. Richard Wagoner Jr. said the company will "significantly" cut losses in 2006. Investment bank Goldman Sachs upgraded its rating on GM on Monday, also helping to boost the stock.

The S&P 500 rose 4.70 points, or 0.4 percent, on Monday to close at 1290.15. The technology-dominated Nasdaq composite index, buoyed recently by big gains at Internet firms such as Yahoo Inc. and Google, closed at 2318.69, up 13.07 points, or 0.6 percent.

The Nasdaq and the S&P 500, which raced ahead far faster during the technology and telecommunications stock market bubble of the late 1990s, have more ground to make up than the Dow. The Nasdaq remains 54 percent below its all-time high of 5048.62, hit on March 10, 2000. The S&P 500 is still 16 percent below its bull market high of 1527.46, reached on March 24, 2000.

Wells Fargo Investments economist Scott Anderson said much of the current rally is based on a belief among investors that the Federal Reserve will stop raising interest rates in the near future. After a dismal December, the market began its latest climb last Tuesday, when the Fed released minutes from a December meeting in which policymakers said the number of future rate increases "probably would not be large." Higher interest rates make it harder for companies to borrow and expand. Higher rates also tamp down consumer spending, by far the biggest driver of the economy.

Anderson said rising consumer confidence, combined with heavy government spending on rebuilding in the Gulf Coast and corporate spending on new information technology, could help support the current market rally. "All of these factors are combining at the right time," he said.

Jack Ablin, chief investment officer at Harris Private Bank, noted that stocks in the S&P 500 now trade at about 14.9 times their expected earnings, slightly below the historic average of 15. That means stocks do not appear overvalued, as they did during the bubble years. "There are some elements in place that should make further near-term gains easier," he said.

Several traders said they were just happy to finally put the big, round number behind them so they could stop worrying about it. "It was a little slow and plodding, but we got there. And it's been a long time coming," said Todd Leone, head of trading at SG Cowen. "Now we'll just see if we can carry it through tomorrow."

Movers

J.P. Morgan Chase added 65 cents, to finish at $40.67, after its upgrade to "neutral" by Prudential Equity Group, which issued an improved outlook for investment banking and asset management firms.

Texas Instruments sank 27 cents, to $34.18. It said it is selling its sensors and controls business to Bain Capital for $3 billion and instead will shift its focus to digital signal processing and analog chips.

International Business Machines fell $1.22, to $83.73. J.P. Morgan lowered IBM one notch to "neutral," saying that potential growth is already reflected in its stock price but that several risk factors in services and hardware are not yet being considered.

Amazon.com dropped 79 cents, to $47.08. J.P. Morgan also said it expects Amazon.com's growth will lag the broader U.S. e-commerce market, and cut the stock to "underweight."

Indexes

New York Stock Exchange composite index rose 21.76, to 8053.42.

American Stock Exchange index rose 4.56, to 1809.02.

Russell 2000 index of smaller-company stocks rose 6.55, to 706.24.

Volume

NYSE: 2.33 billion shares, down from 2.48 billion on Friday. Advancers outnumbered decliners 2 to 1.

Nasdaq: 2.0 billion shares, down from 2.29 billion. Advancers narrowly outnumbered decliners 11 to 7.

Commodities

Light, sweet crude oil for February delivery: $63.50, down 71 cents.

Gold for current delivery: $549.10 a troy ounce, up from $539.70 on Friday.

Associated Press contributed to this report.