Dow Clears 18000 After Five-Day Tear

By E.S. Browning 

        In a stunning turnaround, the Dow Jones Industrial Average finished above 18000 on Tuesday for the first time ever, after gaining nearly 1,000 points in five trading days.
        The immediate catalyst Tuesday was a bundle of positive economic news. It showed that consumer spending finally has begun to strengthen, and that resilient consumers pushed the economy ahead at a 5% annual rate in the third quarter, the fastest pace in 11 years.
        The market's 1,000-point run impressed and pleased traders, but it also raised some concerns. The surprisingly strong economy could induce the Federal Reserve to raise its target interest rates sooner than many investors expected next year. And surging stock prices left shares expensive compared with historical averages, leading some experts to worry that stocks could give back some of the gains in the first part of 2015.
        "There's a lot of good news out there" that explains the gains, said Jim Dunigan, chief investment officer at PNC Wealth Management, which oversees $132 billion. But "it raises the question: How much better can it get? It sets us up for potential disappointment" if bad news about employment, geopolitics, oil-company debt or something else hits the tape.
        While Mr. Dunigan isn't predicting a big drop, he said he wouldn't be surprised to see the market lose some ground early in the new year.
        The Dow industrials rose 64.73 points, or 0.36%, on Tuesday to 18024.17, a gain of 955.30 points, or 5.6%, in five trading days. It was the largest five-day percentage gain since 2011.
        The short-run gain was impressive, and so was the long-term one. The Dow was down to 6547.05 on March 9, 2009, and has risen 175% since then. The broader S&P 500 index has tripled in that same period and the Nasdaq Composite Index is up 276%. Even the beleaguered Russell 2000 small-stock index finished less than 1% from a record.
        The move to 18000 from 17000 took only 120 trading days, the quickest such 1,000-point gain since before the financial crisis. Point-gains come more quickly as the index rises, of course, since each 1,000 points represents a declining percentage of the index value.
        Even oil managed a gain on Tuesday, with crude-oil futures rising $1.86 a barrel, or 3.37%, to $57.12. Oil remains down 47% from its June 20 high, however.
        A change in market outlook on the importance of oil's decline helped fuel the past week's gain. Investors drove stocks down nearly 900 points from Dec. 5 through Dec. 16, in part because of fears that plunging oil prices could cause oil producers such as Venezuela or Russia, or small U.S. oil-service companies, to have trouble repaying their debts.
        All that changed after the Fed promised on Dec. 17 to be "patient" about raising rates next year. Once the market turned, many money managers felt they had no choice but to jump in, to avoid seeing their 2014 performance fall well behind that of the index.
        After Tuesday's record close, the S&P 500 now trades at 19.7 times the net profits of its component companies, well above its long-term average of 15.5, and above its level of 18.6 one year ago, according to Birinyi Associates.
        The question now is whether the strong economy and resilient stock market will make the Fed conclude that it doesn't need to be as patient as it promised. While markets and the economy should be able to withstand mild interest-rate rises, higher rates aren't as beneficial for stocks and bonds as lower ones.
        "There are worries about when the Fed will raise rates and what will happen when it does," said Janna Sampson, co-chief investment officer at OakBrook Investments, which manages $2 billion.
        Research firm Capital Economics wrote in a report: "The clear strengthening in activity towards the end of 2014 may prompt some Fed officials to consider whether they need to raise rates before the middle of 2015."
        The economic news wasn't all good. Orders for big-ticket equipment fell in November--negative news for the manufacturing sector at a time when the consumer sector is looking stronger.
        A Commerce Department report showed consumer spending for November rising at the fastest pace in three months. The University of Michigan's consumer-sentiment index fell slightly from a preliminary reading earlier in the month, but still showed a big gain from November and exceeded economists' expectations.
        "This stock rally was fast and furious," said Andy Brooks, head of stock trading at asset-management firm T. Rowe Price in Baltimore. "We flipped pretty quickly" from fears about oil to confidence that the economy would be fine.
        Investors have been waiting for years for signs that soft consumer spending is finally picking up, and now it is happening. The Commerce Dept. report said strong consumer spending was a big reason for the robust economic growth. That in turn will be good news for corporate profits, the lifeblood of stock gains.
        "It's probably true that we are due for a consolidation" after the huge gains, said Mr. Brooks. "But let's not forget that the economy is doing better. The unemployment picture has improved."
        Write to E.S. Browning at jim.browning@wsj.com
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        (END) Dow Jones Newswires

        December 23, 2014 19:52 ET (00:52 GMT)

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