Dow Jones average breaks above 10,000 on recovery speculations

15:00, October 15, 2009      

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Wall Street soared Wednesday, sending Dow Jones Industrial Average climbing above 10,000 for the first time since October 2008.

The index broke the psychologically important mark, more than a year after plummeting through it near the height of the financial crisis, as investors bet on the economy's recovery from the most severe economic crisis since World War II.

Traders work on the trading floor of the New York Stock Exchange in New York, the United States, Oct. 14, 2009. Wall Street surged Wednesday and Dow Jones Industrial Average briefly climbed above 10,000 for the first time since Oct. 2008, as investors were boosted by surprisingly strong earnings reports from Intel Corp. and JPMorgan Chase & Co. (Xinhua/Liu Xin)

"Psychologically, that's a great number to cross. In fact, we closed over 10,000," said Alan Valdes, vice president of Hilliard Lyons, a member of the New York Stock Exchange. "Look back to see a year ago, there was confidence fear that we will have a total meltdown and go into a depression."

The last time the Dow broke 10,000 was on the down side. It happened on Oct. 6, 2008, during the darkest days of the financial crisis and just three weeks after Lehman Brothers failed, an event that many experts attribute to the acceleration of the financial system's collapse. The Dow dropped 3.5 percent that day and would never visit five figures again.

No one had expected the major indexes to rebound so strongly and so fast. The Dow is now up 53 percent from its March low, almost 3500 points. Moreover, the S&P 500 has rebounded 61 percent from a 12-year low in March, leaving it 13 percent below its level on the day before Lehman Brothers' bankruptcy filing in September 2008 intensified the financial crisis.

Surprisingly, U.S. stocks climbed to the level on speculation that the nation's economy was recovering.

Investors have returned to the stock market after the U.S. government lent, spent or guaranteed 11.6 trillion U.S. dollars to shore up banks and revive the economy after Lehman Brothers pushed the financial system to the brink of collapse.

Upbeat corporate earnings reports also helped the market set the tone. Earnings will provide strong insight into just how strong any economic rebound has been so far and how strong a recovery will be.

Better-than-expected first-quarter results from banks set off the stock market's rally seven months ago, and even stronger second-quarter results helped consolidate the rally in July.

During the second quarter, companies largely beat modest earnings estimates by cutting costs and streamlining operations. 72.3 percent of S&P 500 companies surpassed the average analyst expectations for earnings, matching the highest proportion in Bloomberg data going back to 1993. This helped the market's rally throughout the summer.

For the third quarter, investors will be looking for actual growth in revenue and sales as the momentum of earnings grows. That would indicate companies are starting to get their footing again and consumers are relaxing the grip on their purse strings.

Companies that have released third-quarter earnings functioned as catalysts when the market tried to reach the 10,000 level.

Earnings season got off to a good start last week when aluminum maker Alcoa Inc. reported a surprise profit. Intel, the world's largest computer-chip maker, reported a smaller-than-expected decline in profit and sales after the closing bell of Oct. 13, 2009, topping analysts' estimates. The reports added to the evidence that the global economy is recovering from the severe recession.

JPMorgan Chase, the first major bank to report third-quarter earnings and the second-largest U.S. bank by assets, said profit in the third quarter soared to 3.59 billion dollars, almost sevenfold, beating analysts' estimates. Better-than-expected quarterly reports from banks have been the key driver of the market's seven-month-long rally.

Goldman Sachs Group Inc., General Electric Co. and Citigroup Inc. are among the companies that would report quarterly results late this week. "We think we will have a pretty good earning season, though we have 26 Dow stocks yet," said Valdes.

Meanwhile, the dollar has fallen steadily over the past few months, as investors, more upbeat about the economy, take money out of traditional safe-haven assets and put it to work in stocks.

Moreover, improving economic data also strengthened investors' confidence in the economy. The housing market showed signs of stabilization. The manufacturing sector began to expand after nearly two years of contraction. Also, the Conference Board's gauge of the economy's prospects in the next three to six months increased more than forecast.

The 10,000 level is psychologically important, but most analysts agree that the 10,000 number itself does not represent a significant level from a technical or fundamental standpoint.

It is one of those psychological barriers -- much like 1,000 was for the Standard & Poor's 500 or 2,000 for the Nasdaq -- that makes individual investors more comfortable but doesn't change anything as far as market fundamentals go.

The performance of the U.S. economy is probably more sluggish than reflected in stock markets, which means a potential correction is possible.

Companies' earnings reports will determine where the market heads next. Disappointing earnings could easily upset investors who are looking for reassurance that the economy is growing and lead them to sell stocks.

Also, the U.S. economy is still losing a quarter of a million jobs a month, which pushed the unemployment rate up to 9.8 percent in September, the highest since June 1983.

Traders, however, cheered about the Dow breaking 10,000, because it may bring three trillion dollars on the sidelines back into the market.

"The Dow probably goes a little over 10,000 or probably stays here for the rest of the year," Valdes predicted.

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