Dow closes above 13,000 with a whimper, not a bang
The sixth time is a charm. After a week of fits and starts, the Dow Jones Industrial Average finally closed above 13,000 -- 13,005.12, to be exact -- for the first time since May 19, 2008. Everyone knows that 13,000 is just a round number, and as MoneyWatch blogger Allan Roth notes the Dow is a pretty lame index of only 30 stocks. (Allan recommends that investors use the total return of broad indexes, such as the Wilshire 5000 full-cap total return for U.S. stocks.)
Still, the Dow is the best-known and most closely followed stock barometer, so we do care when it breaks through these psychological milestones, especially after living through the brutal bear market. You may not want to recall, but in March 2009 the Dow bottomed out at an intra-day low of 6,469 and a closing low of 6,547. Closing above 13,000 means progress, given that the Dow has almost doubled from the depths of the crisis.
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There was nothing particularly encouraging piece of economic news today that got us over the hump. In fact, durable goods orders fell 4 percent in January, the largest decline since January 2009, while fourth-quarter home prices tumbled to post-crisis lows. But investors seemed to take solace in strengthening consumer confidence, which rose to its highest level in a year.Given that the Dow touched a 52-week intra-day low of 10,404 only in October, the recent move is substantial. U.S. stocks have gained 22 percent since those precarious lows, and the blue-chip index is only 8.9 percent away from the all-time closing high of 14,164.53, reached on Oct. 9, 2007.
The obvious question: Why have stocks have done so well? The answer is three-fold: 1) Greece and Europe haven't collapsed (yet, anyway); 2) U.S. economic data has improved; 3) Central banks around the world have turned on the monetary spigots. Let's take those point by point:
1. Last fall, there was a real fear that the European Union was coming apart at the seams. Greece looked like the Lehman Brothers of the eurozone, heralding global financial chaos, and borrowing costs for Spain and Italy were skyrocketing. But the situation began to stabilize in December after the European Central Bank created the so-called Long Term Refinancing Operation, a mechanism for lending money to European banks at one percent. The banks in turn took over $650 billion and lent it to weak European economies, which prevented a run on those countries' sovereign debt. In the second round of LTRO, the European Central Bank allotted over $712 billion to 800 banks.
2. The U.S. economy has seen steady, if unspectacular, improvement across the board since October. The greatest progress has been on the employment front. January saw the creation of 243,000 new jobs, trimming the unemployment rate to 8.3 percent, which was the lowest level since February 2009. There has also been improvement in manufacturing, and even in the beleaguered housing market shows glimmers of activity.
3. Easy money: Not only has the ECB opened the taps, but the Federal Reserve has said it would keep its benchmark rate at zero to 0.25 percent until 2014. China also has sought to get capital flowing by easing bank reserve requirements. With global central banks following a highly accommodative monetary policy, investors are more inclined to move into risk assets, like stocks.
