Global Headwinds No Match for Dow at 18,000 Milestone

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U.S. Economy
Customers walk through a Macy's Inc. store ahead of Black Friday in New York, U.S., on Nov. 27, 2014. Data today showed the world’s largest economy expanded at the fastest pace in more than a decade, with gross domestic product growing at a 5 percent annual rate from July through September. Photographer: Peter Foley/Bloomberg

The Dow’s march to the 18,000 level had to overcome a long lineup of obstacles this year. None of them was a match against the Federal Reserve and the U.S. economy.

The Dow Jones Industrial Average rose 5.6 percent over the past five days for the biggest rally since 2011, climbing to 18,024.17 yesterday, as the central bank pledged patience in raising interest rates while data showed the economy roared the most in the third quarter since 2003. A measure of expected volatility in the Dow has fallen the most in three years during the recent rally.

U.S. equities faced upheavals in 2014 that threatened to derail a bull market in its sixth year, ranging from violence in the Ukraine to an Ebola outbreak and a bear market in oil prices. Yet the Dow’s worst retreat was only 7 percent, and the gauge recovered from each decline in about two months.

“Things have been getting better for five years,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. “Corporate America is doing fantastic, earnings are at an all time high, interest rates are low, inflation is low, and now you have the added positive of low gasoline prices. All of that adds up to a pretty good environment for equities.”

It’s been 172 days since the Dow closed above 17,000 on July 3, data compiled by Bloomberg show. That’s the fifth-fastest trip between thousands, with the record being 35 days to 11,000 in May 1999. It took the index almost 5,200 days to go from 1,000 to 2,000 between 1972 and 1987, according to Howard Silverblatt, an index analyst at New York-based S&P Dow Jones Indices.

Fed Stimulus

The Dow closed at a six-month low on Oct. 16 before rallying more than 1,882 points, or 12 percent, to top 18,000. Its futures were little changed at 9:42 a.m. in London. The Chicago Board Options Exchange Dow Jones Industrial Average Volatility Index, a measure of demand for options on the blue-chip stocks gauge, has fallen back after two jumps of more than 70 percent since September.

The industrial average has risen about 175 percent during the bull market that began in March 2009, propelled by better-than-estimated corporate results and three rounds of Fed bond purchases. The Standard & Poor’s 500 Index has more than tripled in that time. It rose 0.2 percent yesterday to finish at an all-time high.

Throughout 2014, the Dow has shown an ability to bounce back from selloffs driven by macroeconomic events.

Ukraine Turmoil

From a high on Jan. 7 through Feb. 3, the benchmark gauge tumbled 7 percent as the Fed began trimming its monthly bond purchases, a move that sent emerging-market currencies and equities tumbling. The Dow recovered from that drop by April 2, rallying to a year-to-date high.

A smaller slump took place in the U.S. summer, as turmoil in eastern Ukraine sent the gauge from a record on July 16 to a loss of 4.5 percent by Aug. 7. The Dow rallied to a fresh high on Sept. 19 amid optimism the Fed would support growth even as the economy showed signs of strengthening.

The blue-chip measure slid 6.7 percent from Sept. 19 to Oct. 16. This time, investors sold on concern that signs of slowdown in China and the European Union would hurt the U.S. economy, while the Ebola virus threatened to spread beyond Africa.

The Dow reversed those losses before the calendar flipped to November, closing at an all-time high on Oct. 31.

The industrial gauge has climbed about 9 percent this year, almost three times more than the Russell 2000 Index of small-cap companies.

2014 Records

This is the 36th time this year the Dow has closed at an all-time high. The Dow reached records on 52 occasions in 2013, as the index recovered from the financial crisis to top its previous high from October 2007 for the first time. The S&P 500 has set records on 51 days this year.

The Dow’s rise has been aided by better-than-forecast economic data and corporate earnings that beat analyst forecasts.

Reports yesterday showed the world’s largest economy expanded at the fastest pace in more than a decade, with gross domestic product growing at a 5 percent annual rate from July through September. Last month, American employers hired more people than at any time in almost three years and the breadth of industries adding jobs was the broadest since 1998.

For the third-quarter earnings season, 80 percent of S&P 500 companies beat profit estimates and 60 percent surpassed revenue projections, according to data compiled by Bloomberg. Analysts forecast earnings for the S&P 500 grew 6.9 percent this year, and will climb 6.6 percent in 2015. The U.S. economy is estimated to grow 3 percent next year.

Tech Boost

Technology companies have had some of the biggest gains in the Dow this year, with Intel Corp. rising more than 44 percent and Microsoft Corp. jumping 29 percent. Consumer shares such as Home Depot Inc., Walt Disney Co. and Nike Inc. have also risen at least 22 percent to lead the 30-stock gauge’s advance.

Nike, UnitedHealth Group Inc., Visa Inc., Home Depot and Intel have paced gains during the gauge’s run to 18,000 in the second half of the year, with each rallying more than 20 percent from July 3. Caterpillar Inc., International Business Machines Corp. and Chevron Corp. have been the worst performers, with slumps of more than 13 percent in that period.

The rally that put the Dow over 18,000 came after it retreated 5 percent from a record on Dec. 5 as oil extended losses this year to more than 40 percent, raising concern that economies from Russia to Venezuela may fall into recessions. The ruble tumbled to a record low versus the dollar even as the nation’s central bank introduced stimulus.

Dow VIX

During the selloff, traders snatched up options tracking the Dow average. The Dow VIX jumped 79 percent in seven trading days to 21.48 on Dec. 16. It then fell 34 percent in the next five days as the blue-chip stocks gauge raced past 18,000.

Stocks took off after the Fed said it will be patient on the timing of a rate increase even as U.S. growth shows signs of accelerating. Chair Janet Yellen said any spillover from the situation in Russia is likely to be small, while the central bank’s policy statement didn’t mention turmoil sparked by tumbling oil prices.

The Dow climbed 6.04 points, or less than 0.1 percent, to 18,030.21 at 1 p.m. in New York, while the gauge’s VIX rose 0.7 percent to 14.22. The CBOE S&P 500 Volatility Index, a measure better known as the VIX, dropped 2.9 percent to 14.37.

“It was a big help that Yellen calmed nerves around the spillover of the drop in oil,” John Canally, a Boston-based economic strategist at LPL Financial Corp., which oversees $464.8 billion, said in a phone interview. “Since then it’s been off to the races. This is a pretty solid end to a year that had a little more than normal volatility.”

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