It is only a number, the stock market equivalent of an appliance chain’s millionth customer, or the gazillionth hamburger served at McDonald’s. Still, the Dow, which closed up 124.17 points, at 9,789.36, on Monday, is within reach of 10,000. Who would have thought?

At the depths of Wall Street’s crisis, when traders were despairing and shares of Citigroup were trading for just over a dollar, Dow 5,000 seemed a likelier prospect than this. But now, one of the most-watched measures of the financial world is on the cusp of jumping back to five-digit territory.

That does not mean the economy’s problems are over, or that 401(k)s are going to be made whole anytime soon. In fact, this milestone could even stall the rally if enough investors use it as an opportunity to cash in their gains, analysts say. But a big round number is often seen as a way of assessing the market’s health, and whether it has enough juice to climb much higher.

“Will 10,000 make a difference to some people?” said Stuart Freeman, senior equity strategist at Wells Fargo Advisors. “It’s psychological, but if enough people act on it, it’s meaningful. The higher a market goes, the more that those on the sideline sit there and are concerned they’re missing something. It takes a while for their fear to wear off.”

Indeed, investors who pulled out of the market as Wall Street crumbled would have missed a Dow that has rebounded more than 3,000 points in seven months. The Nasdaq index is up 35 percent since the start of the year, and the Standard & Poor’s 500-stock index is up more than 17 percent.

Some of the recession’s biggest winners are again flying high, with stocks like Goldman Sachs closing at $182.50 a share. JPMorgan Chase reported nearly $3 billion in quarterly profits this summer. Shares of Apple are flirting with record highs.

Much of the run-up has been fueled by signs that some corners of Wall Street, helped by Washington’s taxpayer lifelines, have returned to functioning almost normally. Corporate mergers and public stock offerings appear to have rebounded in recent weeks, pulling the market higher. Short-term loans are flowing. Companies with better credit can again raise money without paying huge risk premiums.

Yet the Dow at 10,000 could also herald a pause in the white-knuckle rally. Analysts are divided about whether the stock market is overpriced or underpriced now, but stocks have gotten much more expensive since the main indexes hit their lowest points in a decade in early March.

A share of Bank of America, which was selling for a little more than $3 in March, now costs $17. Shares of the American International Group, the corporate image of the financial crisis, have surged sixfold, although the price is still a small fraction of what it was before the government rescued the company.

And even if the recession is technically nearing an end, 15 million people are still unemployed, and stagnant incomes and higher rates of personal saving could reduce corporate revenue growth to a trickle for years to come.

Then there are the potential new waves of mortgage foreclosures; fresh losses in commercial real estate; consumer defaults on credit cards; and the possibility of another bubble in oil prices, all of which could prevent markets from enjoying anything like exuberance for a while.

“The bottom line reality is, it’s still an economy that’s in the midst of a major change,” said Bill O’Grady, chief market strategist at Confluence Investment Management. “The real debate that underlies the Dow 10,000 story is the raging debate about what is going to be the form of the recovery.”

The enthusiasm over that round figure is now a decade-long phenomenon. Consider this: President Bill Clinton was in office when the Dow Jones industrial average first closed above 10,000 in March 1999. It retreated in the years after the dot-com bubble deflated, then retook 10,000 in late 2003 and peaked at 14,000 in October 2007. We all know the cataclysm that followed.

So Dow 10,000 does not mean that the market is finally edging ahead; it is simply catching up to where it was a decade ago. “It’s been a bad 10 years, a really bad 10 years,” said David Bianco, chief US equity strategist at Bank of America/Merrill Lynch.

The constant march of inflation also dilutes the meaning of 10,000. Prices rose an average of about 2.8 percent each year in the last decade, meaning the Dow would have to reach about 13,200 in today’s numbers to equal its value then. If this limbo seems dreary, imagine spending the next decade talking about Dow 10,000.

The Dow first closed above 100 points in 1906, when Theodore Roosevelt was president and American Car and Foundry and National Lead were members of the index. And it did not go much higher from there. It was still close to 100 as the 1920s began, then spiked at the end of the Roaring Twenties. But it crashed during the Depression, and was once again hovering around 100 as the United States entered World War II.

In 1966, the Dow came within 20 points of hitting 1,000, then fell off sharply. The stock index kept bumping its head against that threshold for more than 15 years as the US economy endured high inflation, oil embargoes, price controls and regular swings in the stock markets.

Not until 1982 did the Dow move decisively above 1,000. “You can spend years around a particular milestone,” said Tobias Levkovich, chief US equity strategist at Citigroup. “I’m not talking about a year or two. I’m talking about way more than 10. They’re not short-term phenomena.”

The New York Times ran a front-page article about the Dow’s first trip across the 10,000 marker in 1999. This article is being written in September 2009. Investors should hope there will not be a similar article in 2019.

source: Economictimes

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