The blue chip benchmark tantalized investors Oct. 12 by coming within 68 points of five digits. But market pros aren't chilling the bubbly just yet
It's not a foregone conclusion, but, if all goes right for stock investors, the Dow Jones industrial average could surpass the 10,000 mark soon.
On Oct. 12, the 30-stock blue chip benchmark rose 21 points, to 9,885, putting the widely watched index within a strong day's rally of the big round number that seems to preoccupy many investors. (At one point in the session the Dow stood just 68 points away.)
The 10,000 milestone is likely to garner big headlines. It would remind average investors that equities have achieved big gains since the market lows of seven months ago.
Wall Street veterans, however, are likely to greet the Dow's achievement with a collective yawn. "To me, it means nothing," says Dave Rovelli, managing director of equity trading at Canaccord Adams.
Lagging Other Market Measures
Traders, strategists, and portfolio managers all but ignore the Dow in favor of other indexes. Unlike the Standard & Poor's 500-stock index, which serves as the basis for a bevy of mutual funds and exchange-traded funds, very few investments are based on the Dow.
One reason is that the Dow is small and unrepresentative: While the S&P 500 consists of 500 companies from all segments of the U.S. economy, making it an appealing proxy for the broader stock market, the Dow features just 30 stocks, all very large corporations.
The last year has demonstrated the oddities of the Dow. The blue chip index has significantly lagged other measures of the stock market.
The Dow did slightly better than other indexes during the market turbulence of 2008 and early 2009, but it has fallen far behind during the market's recovery. If the Dow had performed as well as the S&P 500 in 2009, it would already be approaching the 10,500 level.
Taking Risks vs. Playing Defense
A key feature of the stock market's recovery since March has been its favoring of smaller, riskier companies. Since the lows in March, the Dow is up about 50%, but the S&P 500 is up 58%. Meanwhile, the tech-heavy Nasdaq composite index has advanced 66%, and the small-cap Russell 2000 index has jumped more than 75%.
If the Dow had performed as well as the small stocks in the Nasdaq and Russell 2000 this year, it would be above 11,000 by now.
"What you've seen this year has not been atypical of what you get when the economy transitions from recession to recovery," says Keith Goddard, manager of the Capital Advisors Growth Fund (CIAOX). The highest quality stocks lag, he says. In terms of share-price performance, huge, well-respected companies like Wal-Mart (WMT) and Procter & Gamble (PG)—both Dow components—fell behind small firms that several months ago looked to be "on the brink of bankruptcy."
There are some on Wall Street who believe investors' enthusiasm for riskier, lower quality stocks could be waning, particularly after the eye-popping gains of the last seven months.
In recent weeks, according to Mike O'Rourke, chief market strategist at brokerage BTIG, the market has gone back and forth between favoring big, defensive names and buying riskier stocks. On any given day, "the shifts between the two groups can be pretty pronounced," O'Rourke says. Either way, broad indexes have tended to move higher, showing that investors have cash they want to put to work, he says.
The Dow's concentration on large-cap companies hasn't been its only disadvantage in 2009. In fact, it's an oversimplification to claim the Dow's components are safe just because they're big. AIG (AIG), Citigroup (C), and General Motors were all members of the Dow—until they lost their membership after running into unprecedented problems requiring government help. Beleaguered financial giant Bank of America (BAC) remains part of the index. "The companies that needed exceptional assistance from the government were all Dow components," O'Rourke notes.
Missing Tech's Boost
The Dow also has suffered from the lack of technology stocks among its members. There are some tech stocks in the Dow's mix—like Cisco Systems (CSCO) and Microsoft (MSFT)—but generally technology is underrepresented in the index. This is a disadvantage, notes independent market strategist Doug Peta, because tech has been a top performer during both the market's slide and its rebound. With its low debt, strong balance sheets, and growth potential, "tech has worked in all weathers this year," Peta says.
Peter Cardillo, chief market economist at Avalon Partners, believes better-than-expected earnings news could push the Dow over 10,000 "sometime this week." But, he notes, "we're still far away from the market's highs."
Another tech component of the Dow, Intel (INTC), reports earnings Oct. 13. Good results from the semiconductor giant could add to the case for tech stocks. Other Dow members reporting results later this week include JPMorgan Chase (JPM) on Oct. 14 and IBM (IBM) on Oct. 15.
Still 40% Off Its High
Rovelli believes the market might not have an easy time topping 10,000, though better-than-expected bank earnings could do the trick. Even if stocks continue to rally, he warns the Dow may not stay above 10,000 for long. Investors are much too optimistic about prospects in 2010, he says. "We're getting way ahead of ourselves."
Whether the Dow breaches 10,000 or not, it's important to take a long-term perspective on the milestone. Investors have been here a few times before: The first time the Dow Jones industrial average traded above 10,000 was Mar. 12, 1999.
The blue chip average may finally regain that level in the days and weeks ahead. Of course, whether the Dow can recapture its all-time closing high of 14,164.53—achieved a mere two years ago—is quite another matter.