Dow Hits New High After a Long Recovery

Far fewer companies are selling stock to the public for the first time. There have been 114 initial public offerings so far this year, down from 134 at this point last year, and way down from 488 IPOs in all of 1999, according to the data service Reuters Estimates. Anti-fraud regulations enacted after a wave of corporate scandals have made it more expensive to go public, and investors are more skeptical of new companies in the wake of both the scandals and the technology bubble.

Though oil prices are falling, oil is still more than twice as high as it was in 2000: $59 versus a barrel versus $27. Gold is far more expensive, as well: It is currently $576 per ounce, compared with $283 in 2000. That means stocks are relatively cheap when compared with other possible investments.

Oil has a particularly complicated relationship with the stock market because high oil prices can crimp corporate profits and economic growth. This week is not the first time since 2000 that the Dow has approached these levels. In early May, the index got within 100 points of the record, but sank back significantly, in part because oil prices were more than $70 a barrel and rising.

There are still risks on the horizon: The Federal Reserve thinks the economy is slowing, and home prices are declining. Although gasoline prices have come down significantly from their highs of more than $3 per gallon, many consumers are still feeling pressure from months of high energy prices and rising interest rates.

"There are some excesses in our economy, just as there were six years ago. Housing is the excess du jour. . . . Equity investing has always been risky," said Stuart Schweitzer, global markets strategist for J.P. Morgan Asset and Wealth Management. "The number one rule for me is to avoid emotion and avoid getting caught up in a market frenzy."

Private equity investor Jeff Ubben worries that today's traders are too complacent. "You've got a whole generation of money managers who haven't seen a consumer recession," he said, noting that the popping of the tech bubble had far more effect on business spending and that consumer spending helped keep that recession shallow and relatively short.

One change that is hard to assess is the rise of hedge funds, lightly regulated investment pools that use borrowed money to take huge positions in financial instruments from stocks to commodities to credit derivatives. Some market analysts think hedge funds make the market more efficient by seeking out and correcting pricing imbalances. Others worry that their use of credit increases the risk of a major market meltdown.

Between the growth of hedge funds and the increased use of computers, the sheer number of trades has changed dramatically. Last year, the most recent for which statistics were available, an average of 1.61 billion shares changed hands daily, up 60 percent from the 1 billion shares in 2000.

Yet the New York Stock Exchange floor on Wall Street is far quieter place today. There is more space to walk, and fewer people are clustered around the specialists putting in trades. Instead, computers buy and sell huge baskets of stocks simultaneously, and automated systems match most buyers and sellers.

The NYSE's longtime chairman Dick Grasso is gone, ousted during a furor over his $140 million retirement package, and the exchange has refashioned itself from a membership institution into a for-profit company that has to watch its bottom line.

"The number of people in the building is down 30 percent in the last 18 months," said Peter Kenny, a floor trader with Jeffries Execution Services Inc. who specializes in managing gigantic transactions discreetly. "It's more and more empty."

The end result: lower trading costs, fewer back-office jobs, and a new emphasis on using computer programs known as algorithms to identify trading opportunities quickly, before the hordes rush in.

Houston-based stock trader Andy Kershner sees the changes. Six years ago, Kershner was a day trader betting his own money on 20- to 30-point swings in individual stocks. In March 2000, he made a big bet that technology stocks were about to fall, but did it a day too early and lost several hundred thousand dollars. Kershner, chairman and chief executive of Kershner Trading Group LLC, now finances and oversees 90 traders who use computers to make enormous bets on far smaller stock movements, generally one to three points, he said.

"Back then, almost everybody traded manually, and they were scrambling and yelling on the phone," he said. "Now you're pushing buttons. You can automate all or part of your trading strategy, and if you don't, you're going to get crushed."

The long boom leading up to the 2000 peak made trading seem easy, Kershner said. "Then, you didn't have to be in the right spot to succeed because the market covered up your mistakes. You just held onto it until it came back," he said.

Today, "there's not the same euphoria."

Staff researcher Richard Drezen contributed to this report.