Great news, or it’s all downhill from here.
Reaction to the stock market closing at 13,000 points for the first time in nearly four years varies, depending on which financial analyst is discussing what it means.
“The biggest impact I see is more of a psychological impact,” said Bart Lewis, senior vice president and branch manager of Morgan Keegan & Co. Inc., a broker dealer and investment firm in Naples.
The Dow Jones industrial average in the past week flirted with the magical number while the market was open until it finally closed Tuesday at 13,005.12, a close enough call that the gain of a single stock, Johnson & Johnson, made the difference. The last time the stock market closed above 13,000 points was May 19, 2008, four months before the fall of the Lehman Brothers investment bank and the worst of the financial crisis.
“I don’t think there’s any special significance about 13,000, although round numbers always attract people’s attention,” said Jay R. Ritter, Cordell professor of finance with the Warrington College of Business at the University of Florida in Gainesville. “What’s more important is the level of the market relative to dividends and earnings.”
Ritter pointed to 12 years ago when the Nasdaq, the second-largest stock exchange after the New York Stock Exchange, reached more than 5,000 points while earnings and dividends of Nasdaq stock were very low, in comparison.
“It’s not surprising that, 12 years later, the Nasdaq index is at less than 3,000 and earnings are still waiting to catch up to justify the level of the Nasdaq index,” Ritter said.
A few years ago, when the stock market was bottoming out, the expected return on stocks was very high, Ritter said.
“The stock market has largely, although not entirely, recovered from the collapse in 2008, because, fortunately, the depression scenario did not develop,” he explained.
Ritter tempered his comments by saying huge government budget deficits will continue to remain a long-term concern.
Even so, the U.S. economy is looking brighter because of the stock market, he said.
“After the 2008 financial crisis, investors fled the stock market due to excessive worries,” Ritter said. “And we’ve recovered, getting back to 13,000, where investors are valuing stocks relative to bonds in a more rational manner.”
Tuesday’s gain puts the Dow 1,160 points below its all-time high, set Oct. 9, 2007. The Great Recession began two months later.
The milestone could draw some fence-sitting investors back into the market and add to the gains, said Brian Gendreau, market strategist at Cetera Financial Group.
“Already here in the first two months, we’ve blown past the consensus expectations for the entire year, and that certainly gets people’s attention,” he said.
The Dow started with its best January since 1997 and has added to that gain. The index is up 6.5 percent for the young year.
“Two months ago, we were talking about a double-dip recession. Now consumer confidence is growing,” said Ryan Detrick, senior technical strategist for Schaffer’s Investment Research.
He said the Dow’s milestone “wakes up a lot of investors who have missed a lot of this rally.”
Others see the 13,000 mark as the start of a downward spiral.
Bob Matheson, a technical trader with his company Matheson Financial in Estero, said some of his economic theorist friends believe the Dow is heading for a fall. The stock market was near 6,000 in 2009, and we may be heading there again, he said.
“We can’t keep spending money in this country like we have been,” he said. “It’s crazy. A good friend of mine says basically that when your outgo exceeds your income, your upkeep becomes your downfall. And that’s what we’re about to have happen here.”
Ritter downplayed any chance for the market to go near 6,000 points anytime soon.
“Anything is possible, but a drop that is that dramatic would require a collapse of the economy,” he said. “And I certainly hope that does not occur.”
Lewis said low interest rates in investments such as Treasury bonds will continue to drive the stock market, especially over the next five to 10 years.
And stock prices are more reasonable compared to bonds, he said, noting those are his opinions and not Morgan Keegan’s corporate position.
“I finally see the light at the end of the tunnel,” he said, “and it’s not an oncoming train.”
The Associated Press contributed to this report