March 5, 2013

Dow hits record, erasing Great Recession losses

The Associated Press

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Trader Peter Tuchman smiles as he works on the floor of the New York Stock Exchange on Tuesday. The Dow reached a new high Tuesday.

The Associated Press

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Will that happen? It's anyone's guess, and financial analysts are often too bullish. A year ago, they expected a 13 percent jump in earnings in the last three months of 2012. They got 4 percent instead.

Investors also need to pay attention to what's happening in the rest of the world. Big U.S. companies generate nearly half their revenue from overseas. The 17 European countries that use the euro as a currency have been in recession for more than a year. Japan, the world's third-largest economy, fell into one late last year. Stock markets tend to look ahead, so what matters is whether the recessions deepen in Europe and Japan or those economies start growing again.

Another worry is what will happen after the Federal Reserve stops stimulating the U.S. economy. Last month, minutes of the Fed's last policy meeting were released, and they showed members disagreeing on when to stop. The Dow lost 155 points in two days.

Jeff Sica, founder of money manager Sica Wealth Management, says the rising market is good because it's a sign of confidence. But he fears stocks could sink when the Fed stops buying bonds.

It's a big "psychological reason the market is going up," he says. "People know the Fed will continue to inflate assets."

The Fed stimulus was in response to the worst economic recession since the 1930s.

The Great Recession began in December 2007, two months after the Dow and S&P 500 reached their peaks in October. It was triggered by a drop in home prices that hammered consumers and banks. Nine months later, in September 2008, Lehman Brothers declared bankruptcy and lending froze worldwide.

Panicked investors began pulling money out of stocks. Prices, which had been falling slowly, nosedived. By March 9, 2009, the Dow had fallen 54 percent and the S&P 500 57 percent.

In total, $11 trillion in stock wealth, or 12 years of stock gains, was wiped out in 17 months.

Despite widespread fear then, the history of bear markets was encouraging. In the second- and third-worst bear markets since World War II, the S&P 500 fell 49 percent in 2000-02 and 48 percent in 1973-74. Both times the climb back took less than six years.

But few people believed four years ago that the return would be so fast.

A few days after stocks bottomed, a BusinessWeek cover story laid out three scenarios for regaining the losses. The most pessimistic held that stocks would notch 6 percent gains each year and the Dow would return to its old high in 2022, 13 years later. The most optimistic assumed 10 percent annual gains and saw a return in 2017, eight years later. The Dow has rebounded in about half the time as the most optimistic case.

The climb hasn't been smooth, though.

In May 2010, a trading glitch set off a so-called flash crash that sent the Dow plunging 600 points in five minutes. In August 2011, stocks yo-yoed for several days on fears that the U.S. would default on its debt. Over three weeks, the Dow plunged 2,000 points. Beginning last October, the Dow fell 1,000 points over six weeks on worries that a budget deal wouldn't get passed and the economy would go over the "fiscal cliff."

But the Fed's bond buying and the ability of companies to produce record profits helped the market overcome every setback.

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