By Brooke A. Masters
Washington Post Staff Writer
Wednesday, October 4, 2006

NEW YORK, Oct. 3 -- The Dow Jones industrial average leaped into record territory Tuesday, highlighting Wall Street's long recovery from the popping of the technology bubble, the 2001 terrorist attacks and a wave of corporate scandals.

The new closing high of 11,727.34 highlights how much things have changed. In January 2000, it was all technology all the time. Internet firms without real business plans and pajama-clad day traders were the glamour kids. Then the bubble burst, Enron Corp. and WorldCom Inc. collapsed, and small investors ran for the hills.

These days, stocks are relatively cheaper, in comparison with corporate profits and with alternative investments, such as gold and other commodities. Blue-chip stocks and unspectacular businesses such as health care and chemical manufacturers have helped lead a slow slog from the troughs of 2002.

"We're hopeful we can pass this milestone and move on. It closes the chapter on the Internet boom," said Andrew M. Brooks, head of equity trading for T. Rowe Price Group Inc. "Most investors are feeling pretty well-served. Not every stock is up, but it's been a pretty nice market."

The Dow, a collection of 30 blue-chip companies that is the nation's oldest stock indicator, had crossed its highest previous close of 11,722.98 several times over the past week but had repeatedly slipped back after investors sold stocks to lock in profits before closing time. The index closed up 56.99 Tuesday.

Investors were buoyed by falling oil prices -- crude fell to less than $59 a barrel for the first time in more than seven months -- and a growing consensus that interest rates have stopped rising for the near term, market-watchers said.

The Dow may be moving into new territory, but the broader indicators have not entirely recovered from their technology-stock hangover. The Standard and Poor's 500-stock index closed Tuesday at 1334.11, up 2.79, but well under its March 2000 mark of 1527.46.

The Nasdaq composite index, which is heavy with technology stocks, closed yesterday at 2243.65, up 6.05 for the day, but it is still worth less than half its 2000 peak of 5048.62. That difference reflects the fact that the Nasdaq rose higher and fell farther in the early 2000s. Many of the technology stocks that survived the crash are doing well, but they are no longer seen as the sure bet they once were.

Even the Dow's record is not quite as impressive as it seems. If inflation is taken into account, the Dow has to rise another 2,150 points before it will set an all-time high. But there have been major positive changes. The current stock market rise is much more broadly based than the one that fueled the record in 2000, and most market analysts think share prices are more firmly grounded in reality.

The S&P's 500 companies are trading at 17.5 times last year's earnings, compared with a price-to-earnings ratio of 28.4 in the first quarter of 2000, S&P chief investment strategist Sam Stovall said. That is largely because many companies have seen their earnings rise much more quickly than their stock price. Stocks on average are also paying higher dividends compared with their price than they did in 2000, he said.

"We have less of an extreme today. Back then, it was the screaming tech stocks, and everything else was marking time," said Bob Doll, president and chief investment officer of Merrill Lynch Investment Management. "This is somewhat healthier. Back then, it was just a few stocks that were leading the way, and unless you owned those stocks, it was hard to keep up. . . . Today there is no leadership. It's one group today and another tomorrow."

There are other signs that suggest this rise in the stock market is less speculative than the one that crested in 2000.

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.