Dow hits record, erasing Great Recession losses

By Bernard Condon

Associated Press

Published: Tuesday, March 5 2013 8:29 p.m. MST

"You have to be greedy when others are fearful," he says, quoting a famous line from billionaire Warren Buffett, who also bought in the panic. Sachs adds, "People are still fearful and that's a good sign. There's room for growth."

He says his portfolio has doubled in value in four years.

As stock rebounds go, this has been an unusually quiet and uncelebrated one. Typically, bull markets are accompanied by rising trading volume, a surge in young companies going public and Internet chatter over hot stocks.

The past four years, none of that has happened.

Adding to the chastened mood is lingering fear among many investors that stock gains can disappear in a flash. Burned by two stock-market crashes in less than a decade, Americans have sold more U.S. stocks than they've bought the past four years, nearly unprecedented in a bull market since World War II.

In this run-up, nearly all the buying has come from companies repurchasing their own stock in an effort to boost its value. Companies in the S&P 500 have bought $1.5 trillion since the Great Recession began in December 2007.

Dow records are dismissed by some investors as unimportant because the index comprises just 30 stocks. Many professional investors prefer to follow the S&P 500, which, as the name implies, tracks 500 companies. But the Dow has closely followed the ups and downs of its broader rival over the years, and is a good proxy for how big companies are doing.

The S&P 500 is up 128 percent from its March 9, 2009 low, about the same as the Dow.

The Dow record is a victory of sorts for Federal Reserve Chairman Ben Bernanke. Under his aegis, the Fed launched an unprecedented campaign to lift stocks by making their chief rival for investor money — bonds — less attractive.

Under a program called "quantitative easing," the Fed has bought trillions of dollars of bonds to drive their yields down. The idea was that the puny yields would so frustrate investors, they'd have no choice but to shift into stocks. That, in turn, would push up stocks and make people feel wealthier and more willing to spend, helping the economy.

Just as Bernanke had hoped, American household wealth, or assets minus liabilities, has risen, though the gains haven't been shared equally.

In the recession, household wealth fell $18.9 trillion, or 28 percent, as the prices of assets like stocks and homes tumbled. But after bottoming in the first quarter of 2009 at $48.5 trillion, wealth rose $16 trillion through the third quarter of last year and was within striking distance of its peak of $67.4 trillion, according to the latest data from the Federal Reserve. Gains since then may have pushed wealth to a new high.

Middle-class households have not recovered as much as those numbers suggest because most of their wealth is tied up in their homes, and home values haven't bounced back like 401(k) accounts.

Homes accounted for two-thirds of middle-class assets before the recession, estimates economist Edward Wolff of New York University. By contrast, they accounted for one-third of assets of all U.S. households. Stocks were 7 percent of middle-class assets, less than half the percentage for all.

The rich have been the biggest winners of this bull market. Eighty percent of all stocks are held by the wealthiest 10 percent of households.

To stock bulls, the economy is on the verge of what Bernanke calls "escape velocity," a self-sustaining pace of growth and better than the sluggish 1-2.5 percent of the past three years. Faster economic growth would boost corporate earnings, which would lead to higher stock prices.

Of course, if investing was as simple as looking up interest rates and stock valuations, we'd all be rich. Plenty can go wrong.

Before the market fell

Remember the world on Oct. 9, 2007? That was when the Dow Jones industrial average last set a record high.

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