The Dow Jones Industrial Average has once again topped 12,000 -- a level not seen since the summer of 2008, when the deepening financial crisis was on the verge of bringing the bull market to its knees. And while crossing that threshold may do little to change the unemployment rate or boost the housing market, stock analysts say it can provide investors with a much-needed psychological boost.
For better or for worse, market watchers say, investors do chase performance. A continued rally above 12,000 could draw even more of those skittish investors off the sidelines and back into the stock market.
There are good reasons to be bullish. First, investors seeking higher returns in today's low-rate environment are likely to continue pumping money into stocks, analysts say. "Investors are more willing to take risk now than they were and that's good for equities," says Tony Crescenzi, market strategist for Pimco. The Dow gained 11% last year, while the yield on a 10-year Treasury note fluctuated between 2.5% and 4%. Investors began taking note late last year, funneling more money into equity funds in November, after six straight months of negative flows, according to the Investment Company Institute.
And investors who are returning to the market are doing so slowly and are sticking with big names — a lift for large companies in the Dow, says Eric Marshall, director of research at the Hodges Fund. They're also looking for strong corporate profits, and analysts say this earnings season, which started this month, will continue to highlight just how far many blue-chips have come since the market collapse by cutting debt and building up their cash reserves.
Another reason to believe this rally has legs: The third year of a president's term has historically been good for stocks, says Sam Stovall, chief investment strategist of Standard & Poor's Equity Research. Since World War II, the S&P 500 has gained an average 17% on the third year of a U.S. presidency, compared to an average 8.5% gain for all years, says Stovall. The first quarters of those years are particularly strong, with the stock market rising nearly 90% of the time.
Of course, the market still has plenty of challenges. A rise in interest rates or inflation could make stocks less appealing and lead to quick selloff, says Stovall. And the high unemployment rate – which has topped 9% for 20 consecutive months through December – remains a serious threat to the market upswing. "We are clearly in recovery mode -- all is not well in the economy," says Stovall.
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