The Dow Passes Mile 10,000 on Road to Recovery
Joblessness in the Way of Future Gains

By Frank Ahrens
Washington Post Staff Writer
Thursday, October 15, 2009

The last time the Dow Jones industrial average hit 10,000 -- in October 2008 -- it was crashing down through the five-digit barrier and the economy was in meltdown. Yesterday, the Dow surged back up through 10,000, culminating a stunning 53 percent rally since its March bottom.

Does this mean the worst economic crisis since the Great Depression is over?

Not quite. But 10,000 is a milepost on the way to recovery.

For investors who stayed in the market while the Dow plunged from its all-time-high close of 14,164.53 in early October 2007 to 6547.05 only seven months ago -- taking their 401(k)s along for the crash -- Wednesday's close of 10,015.86 marks a partial recovery of lost investments. It means they're roughly halfway back to where they started.

Yet this has been more of a traders' rally than an investors' rally, meaning that many average investors remain on the sidelines, preferring instead to put their money into safer bonds and money-market funds.

The stock market comeback that began March 9 has been led by big banks, which have been propped up by billions of dollars in taxpayer bailouts. Economists and traders worry that long-term gains cannot be sustained unless the government help is withdrawn.

"My biggest concern is much more akin to taking the IV tube out of the patient," said Art Hogan, chief market strategist at Jefferies & Co. "We have to move from an economy that is stimulated by the government to an economy that's self-sustaining. That needs to be orchestrated extremely carefully."

For most Americans, a real recovery comes down to one issue: jobs. With the U.S. unemployment rate at 9.8 percent and expected to crest above 10 percent, 15 million jobless Americans may find little to cheer about in Dow 10,000. High unemployment will cool the sizzling stocks.

"If you don't get a sustained recovery, the market's overvalued," said Steven Ricchiuto, chief economist at Mizuho Securities USA. "I believe it's not going to be sustained. The payroll numbers are telling you that. When you look at the tax collections the government is getting, that's lower. People are not getting hired."

Even the most optimistic bulls do not predict another 50 percent surge over the next half-year. More likely, analysts say, is a "sideways churning," as the economy wrestles to bring down unemployment and companies try to generate profit through new revenue, not just cost-cutting. Bearish economists predict a "double-dip" recession that would see stocks take another dive as unemployment continues to rise.

In meeting minutes released Wednesday, the Federal Reserve revealed that it had raised its growth forecast for next year. But the minutes also show broad internal disagreement over the strength of the recovery.

Wednesday's surge was met by cheers on the floor of the New York Stock Exchange, where traders donned ball caps printed with "Dow 10,000 2.0," a reference to the last time the Dow pushed upward through 10,000 -- more than 10 years ago, in spring 1999.

The gap describes something of a lost decade for the U.S. economy.

As measured by gross domestic product, the economy is about 40 percent larger than it was in spring 1999. This makes the value of Dow 10,000 lower today than 10 years ago.

What's more, in 1999, the total domestic debt -- owed by governments, businesses and individuals -- was $24.6 trillion. Today, it stands at $50.8 trillion and is rising, thanks in part to expanded deficit spending under President George W. Bush and new spending programs, such as the $787 billion stimulus act, under President Obama.

At the same time, the dollar is near a 14-month low against major foreign currencies, sending gold to historic highs of more than $1,060 per ounce as domestic investors and foreign governments hoard the precious metal, fearful of the ongoing depreciation of the dollar.

The Dow got its final nudge over the 10,000 mark on Wednesday partly because of banking giant J.P. Morgan Chase, which reported a third-quarter profit of $3.59 billion.

But the bank's earnings illustrated the ongoing Wall Street-Main Street schism at the heart of the U.S. economy.

Chase's profit was fueled by its investment banking business. At the same time, the bank reported that it has doubled the amount of money put aside to cover failed credit card and home loans. Chase said the loan losses would continue for the foreseeable future, but Wall Street traders didn't care: They pushed shares of J.P. Morgan Chase up 3 percent on Wednesday.

Overall, Chase is up nearly 200 percent since the March 9 bottom, more than triple the performance of the Dow and Standard & Poor's 500-stock index, but a modest rise compared with some of its mega-bank rivals.

Stock prices, as valued by their price-to-earnings ratios, are at about the same level as during the 1990s stock market run-up, Ricchiuto said. But if investors who own stock in their retirement plans kept their money in those accounts since March, when prices were low, they were able to increase their holdings cheaply.

Now, with the Dow at 10,000, when will investors see it regain its historic high of 2007? Years? "Yes," Ricchiuto said. "Years."

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