AND ONE ECONOMY TO RULE THEM ALL:

New high for Dow reflects economy's resilience (Drew DeSilver, 10/04/06, Seattle Times)

[A]s the oldest and most widely recognized stock index, the Dow reaching a new high is sure to lead more people to take a closer look at the bull market, now four years old and counting.

The current rally is structurally different from the giddy buying binge that sent the Dow and other major indexes soaring in the late 1990s — and, not coincidentally, made a lot of people in the Seattle area very rich.

Since October 2002, when the Dow hit its post-crash low, it has risen 61 percent; other, broader market indexes also have risen strongly, with most major market sectors posting gains.

That, Dickson said, reflects the underlying strength of the economy and the record corporate profits it has generated.

By contrast, the late-'90s bull was led almost entirely by technology, Internet and telecommunications stocks — and only a relative handful of those. Their strong performance masked the weakness in most other sectors, which had crested in 1997 or 1998 and were struggling by 2000.

Stocks also are cheaper now than they were six or seven years ago.

Analysts often think of buying a share of stock as buying a share of a company's future profits. The question, then, is how much are you willing to pay today for a slice of United MegaCorp's profits over, say, the next year?

Wary investors, still smarting from the tech bust, have resisted bidding up the price of stocks. The stocks in the Standard & Poor's 500 are collectively trading at around 13 times their expected next-year earnings, Dickson said, compared with 27 times future earnings in 2000.

Not only are the current valuations closer to the long-run average, he said, but they indicate that stocks are, if anything, somewhat underpriced.

The markets' strength also reflects assumptions that the economy, while slowing, will continue to grow into next year and beyond. Many observers said falling oil prices, which hit $58.68 a barrel Tuesday, will put money in consumers' pockets and help counteract the deflating housing market.

Recognition that deflation hasn't gone away just because oil prices blipped upwards for awhile will in turn force the Fed to cut rates, which will combine with the excess money in all our pockets and immigration amnesty to start driving the housing market again.

MORE:
Dow Hits New High After a Long Recovery (Brooke A. Masters, 10/04/06, Washington Post)

Even the Dow's record is not quite as impressive as it seems. If inflation is taken into account, the Dow has to rise another 2,150 points before it will set an all-time high. But there have been major positive changes. The current stock market rise is much more broadly based than the one that fueled the record in 2000, and most market analysts think share prices are more firmly grounded in reality.

The S&P's 500 companies are trading at 17.5 times last year's earnings, compared with a price-to-earnings ratio of 28.4 in the first quarter of 2000, S&P chief investment strategist Sam Stovall said. That is largely because many companies have seen their earnings rise much more quickly than their stock price. Stocks on average are also paying higher dividends compared with their price than they did in 2000, he said.

"We have less of an extreme today. Back then, it was the screaming tech stocks, and everything else was marking time," said Bob Doll, president and chief investment officer of Merrill Lynch Investment Management. "This is somewhat healthier. Back then, it was just a few stocks that were leading the way, and unless you owned those stocks, it was hard to keep up. . . . Today there is no leadership. It's one group today and another tomorrow."

There are other signs that suggest this rise in the stock market is less speculative than the one that crested in 2000.

Far fewer companies are selling stock to the public for the first time. There have been 114 initial public offerings so far this year, down from 134 at this point last year, and way down from 488 IPOs in all of 1999, according to the data service Reuters Estimates. Anti-fraud regulations enacted after a wave of corporate scandals have made it more expensive to go public, and investors are more skeptical of new companies in the wake of both the scandals and the technology bubble.

Though oil prices are falling, oil is still more than twice as high as it was in 2000: $59 versus a barrel versus $27. Gold is far more expensive, as well: It is currently $576 per ounce, compared with $283 in 2000. That means stocks are relatively cheap when compared with other possible investments.

Dow Jones Index Hits a New High, Retracing Losses (VIKAS BAJAJ, 10/04/06, NY Times)

Stocks have been climbing without fanfare since late in July, bolstered by a decline in energy prices and by mounting signs that the Federal Reserve will not raise interest rates again this year.

The spark for yesterday’s gains was a 4 percent drop in oil prices that pushed the next-month futures price of crude oil below $60 a barrel for the first time since March.

In 2000 and the years leading up to it, the rally was fueled by demand for computers and telecommunications and a belief that the Internet would transform business. The rally over the last few months has had more modest roots: signs that the economy is moderating and inflation is tame. Investors have been encouraged that falling crude oil and gasoline prices, while a sign of slowing demand, will restrain inflation and spur consumer spending. And investors have been heartened by what they hope is a gradual and orderly end of a five-year boom in home sales and construction.

Indeed, many on Wall Street argue that the housing pullback and the decline in energy prices has put the economy in a sweet spot: not growing fast enough to accelerate inflation, but not so slowly that it risks falling into recession.

“There is and will continue to be a building sense of a Goldilocks” market, said James W. Paulsen, chief investment strategist at Wells Capital Management.

Posted by Orrin Judd at October 4, 2006 8:19 AM