The Dow Passes Mile 10,000 on Road to Recovery - Joblessness in the Way of Future Gains/New York Times Editorial: 10,000: Then and Now

The Dow Passes Mile 10,000 on Road to Recovery - Joblessness in the Way of Future Gains
By Frank Ahrens
Copyright by The Washington Post
Thursday, October 15, 2009
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/14/AR2009101403962.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter


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 Economists and traders worry that long-term gains cannot be sustained unless the government help is withdrawn.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.
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"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.
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Now, with the Dow at 10,000, when will investors see it regain its historic high of 2007? Years? "Yes," Ricchiuto said. "Years."






New York Times Editorial: 10,000: Then and Now
Copyright by The New York Times
Published: October 16, 2009
http://www.nytimes.com/2009/10/16/opinion/16fri1.html?th&emc=th


Dow 10,000 brings back glowing memories of good times — and not just for the people in pinstripes walking around Wall Street with “Dow 10,000” baseball caps. When the Dow Jones industrial average first closed above 10,000 on March 29, 1999, the economy was in its eighth year of uninterrupted growth. The jobless rate was so low — 4.2 percent — that economists called it “full employment.”

The Dow passed the milestone again this week. It was the 25th time since that day a decade ago. As far as we can tell Wall Street is the only place celebrating.

The chasm between the Dow’s stellar performance and the dismal state of the American economy is of historic proportions. The unemployment rate is now at 9.8 percent. Employment as a share of the population is at its lowest level since January 1984. State governments are teetering near bankruptcy. Solvent businesses are seeing their credit lines cut or canceled. Consumer and mortgage lending are both down, while foreclosure filings rose to a record in the third quarter.

And more than a year after the collapse of Lehman Brothers sent the financial system and the economy into a tailspin, the Obama administration and Congress have yet to make the promised financial reforms that are essential to ensure that it all doesn’t happen again.

While the House Financial Services Committee passed a bill on Thursday to regulate trading in derivatives — the opaque and complex financial instruments that played a pivotal role in the crisis — the financial industry has managed to carve out far too many exemptions. Under pressure from banks, businesses and their high-priced lobbyists, the House committee also approved a bill that would seriously weaken the oversight powers of a proposed new consumer financial protection agency.

So why is the Dow doing so well while the rest of the country is struggling?

The stock market usually recovers before the economy does, as managers wring profits from their companies by cutting costs even before sales recover.

The fiscal stimulus headed off an even worse disaster, and investors — who have no place else to put their money with interest rates so low — are elated that things weren’t as bad as they had feared. Not only are banks still around, many have posted stellar profits.

In six of the eight months since March, which is when the Dow started rising, the best-performing stock in the index has been a bank. Many of these banks are doing so well by trading the same sort of financial products that originally drove the system to ruin.

JPMorgan Chase’s otherworldly second-quarter profits, which sent the Dow vaulting over 10,000 on Wednesday, came mostly from investment banking, notably trading in bonds and other fixed-income securities. At the same time, the bank has curtailed consumer and business lending.

Every week that banks refrain from lending — trading their way to a profit while they clean out bad loans from their portfolios — is a lost week to the recovery.

In June, Ben Bernanke, the Federal Reserve chairman, said that the Fed’s objective in mobilizing hundreds of billions of dollars to stabilize the financial sector wasn’t saving banks: “We care about Wall Street for one reason and one reason only — because what happens on Wall Street matters to Main Street.” We can say with no hesitation that there are no Champagne corks being popped on Main Street.