The Dow Jones Industrial Average rose to its highest level ever, erasing losses from the financial crisis after a four-year rally fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve.
Almost $10 trillion has been restored to U.S. equities as retailers, banks and manufacturers led the recovery from the worst bear market since the 1930s. It took the Dow 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.
While the Dow has more than doubled in the four years since its bear-market low, its valuation remains 20% less than the price-earnings ratio at the previous peak and 15% 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.
“Psychologically, it may give a sense that we have recovered a tremendous amount from the depths of the crisis,” Wasif Latif, the San Antonio-based vice president of equity investments at USAA Investments, said by telephone. His firm oversees $54 billion. “On the other hand, it could create a sense of nervousness that we reached an all-time high, so how much more is there to go?”
The 116-year-old Dow jumped 0.7% to 14,226.2 today at 9:40 a.m. in New York, climbing above the 14,164.53 record closing level it reached before the global financial crisis. It also eclipsed its previous intraday high of 14,198.1 from Oct. 11, 2007. The gauge plunged 34% in 2008 for the worst performance in 77 years as the housing bubble burst and the U.S. financial system required a government bailout.
American Express Co., Caterpillar Inc. and Home Depot Inc. have led the Dow’s rally since its 2009 low, climbing more than 275% 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 22% as mobile devices such as Apple Inc.’s iPad and iPhone began to compete with PCs. Exxon Mobil Corp., which has rallied 38%, is the second-worst performer since the gauge bottomed.
Bankruptcies and government bailouts helped make the Dow a different gauge than it was in 2007. Citigroup Inc., American International Group Inc. and General Motors Corp. were removed from the price-weighted average, while Cisco Systems Inc. and Travelers Cos. joined. Kraft Foods Inc., which took over AIG’s spot, was replaced by UnitedHealth Group Inc. last year after the food-maker split in two.