America, birthplace of the credit crisis that erased $37 trillion from global equity values, is leading the world’s stock markets back.
The Dow Jones Industrial Average (INDU) rallied 126 points to 14,253.77 yesterday, joining Denmark’s OMX Copenhagen 20 Index among major stock gauges in the 45 largest markets to regain all-time highs, according to data compiled by Bloomberg. Four years after bottoming, equity benchmarks in those countries are an average of 27 percent below their peaks, the data show.
About $10 trillion has been restored to U.S. equities, fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve. Retailers, banks and manufacturers led the recovery from the worst bear market since the 1930s as the Dow took less than 65 months to rise above its previous high set on Oct. 9, 2007, more than a year faster than the recovery from the Internet bubble.
“The U.S. has been ahead of other countries in terms of its ability to outperform since the crisis,” Jason Benowitz, who helps manage $4.5 billion at Roosevelt Investment Group Inc. in New York, said by phone yesterday. “The potential was there because it started here. It wouldn’t have been possible without the regulatory intervention.”
While the Standard & Poor’s 500 Index remains 1.6 percent from its 2007 high, American gauges including the Dow Jones Transportation Average, the Russell 2000 Index of smaller stocks and the S&P Midcap 400 Index have reached records. By contrast, the U.K.’s FTSE 100 Index has almost 8 percent to rise before regaining an all-time peak, while China’s Shanghai Composite Index must more than double.
The 116-year-old Dow jumped 0.9 percent yesterday, climbing above the 14,164.53 record closing level it reached before the global financial crisis and eclipsing its intraday high of 14,198.1 from Oct. 11, 2007. The gauge plunged 34 percent in 2008 for the worst performance in 77 years as the housing bubble burst and the financial system required a government bailout.
The S&P 500 increased 0.1 percent to 1,541.46 at 4 p.m. in New York today. The Dow climbed 42.47 points, or 0.3 percent, to 14,296.24.
While the Dow has more than doubled in the four years since its bear-market low, its valuation remains 19 percent less than the price-earnings ratio at the previous peak and 14 percent below its 20-year average. Bulls say that’s a signal stocks have room to keep rallying, while to bears it shows a lack of confidence in earnings growth and concern over the Fed’s ability to continue spurring the economy.
“We have a euphoric spirit in the market and that’s always a point of vulnerability,” Byron Wien, vice chairman of Blackstone Group LP’s advisory services unit, said in a Bloomberg Television interview yesterday. “Too much of the money has gone into the stock market. Not enough of it has gone into the real economy. Companies don’t have pricing power. The economy is only growing at 2 percent real, 4 percent nominal, and I think we could see a margin squeeze and some disappointing earnings.”
Among the 45 stock markets tracked by Bloomberg, eight were less than half way from where their peaks were, according to data compiled by Bloomberg. Greece lagged the most in the market recovery, with the Athens Stock Exchange General Index trading 85 percent below its September 1999 high.
Europe accounted for seven of the 10 stock markets trading furthest away from their peaks as the region’s economy contracted for a fifth straight quarter and elections in Italy threaten to derail austerity efforts. Italy’s FTSE MIB Index (FTSEMIB) would need to more than triple from current levels in order to reclaim its all-time high of 50,109 reached in March 2000, data compiled by Bloomberg show.
China’s Shanghai Composite was 62 percent below its 2007 record. The country’s growth slowed last year to the weakest pace since 1999 as the government is seeking to cool property prices.
“It’s excellent news that the Dow has reached a new high,” Andrew Milligan, head of global strategy at Standard Life Investments Ltd., said in a phone interview yesterday. The Edinburgh-based firm manages over $263.9 billion. “Can it continue going forward? Absolutely, but it needs more of the same. It needs policy makers around the world to remain supportive.”
American Express Co., Caterpillar Inc. and Home Depot Inc. have led the Dow’s rally since its 2009 low, climbing more than 275 percent as the economy recovered from the worst recession in seven decades. Hewlett-Packard Co., the largest personal computer maker, is the only stock still in the 30-company gauge to fall since March 9, 2009. The shares tumbled 20 percent as mobile devices such as Apple Inc.’s iPad and iPhone began to compete with PCs. Exxon Mobil Corp., which has rallied 39 percent, is the second-worst performer since the gauge bottomed.
A rebound in corporate profits coupled with more than $2.3 trillion in Fed stimulus have pushed investors back into equities, sending the Dow up more than 116 percent from its March 2009 low of 6,547.05.
Dow profits are projected by analysts to increase 9.2 percent this year and 9 percent next year. Profit from companies in the S&P 500 will exceed $120 a share by next year, double the level in 2008, according to Wall Street estimates. That’s the biggest increase since the 142 percent gain amid the rally in technology stocks from 1993 to 1999.
The operating margin, a measure of profitability, for S&P 500 companies is 19.9 percent after reaching 20.7 percent in August, the highest level in Bloomberg data going back to 1998.
U.S. stocks have rallied this year as fourth-quarter earnings beat estimates and lawmakers reached a compromise on taxes, avoiding the so-called fiscal cliff that would have drained more than $600 billion from the economy.
The Dow has climbed more than 17 percent since last year’s June low as Fed Chairman Ben S. Bernanke pledged the central bank will buy $85 billion of mortgage and Treasury securities a month until the labor market recovers. Minutes from the Federal Open Market Committee’s January meeting showed policy makers were divided about Bernanke’s program of buying bonds. The U.S. unemployment rate has fallen to 7.9 percent from 10 percent in 2009.
Laszlo Birinyi, among the first money managers to advise buying U.S. stocks four years ago, has said the bull market rally is entering a final phase as investors who had previously shunned shares capitulate and buy.
Investor deposits with global equity mutual funds in the first week of January were higher than any other period except one, according to data compiled by research firm EPFR Global in Cambridge, Massachusetts, going back to 1996. Money flows into stock mutual funds were positive in January for the first time in 11 months and the highest in nine years, according to data from Washington-based Investment Company Institute. That represents a turnaround after investors pulled more than $600 billion from stock funds in the last five years, ICI data show.
“People are now starting to realize that it is a bull market,” Birinyi said in a Bloomberg TV interview yesterday. “It’s not going to come back, you’ve missed the train, and the train still has a long way to go. But you better get on it.”
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