Dow 12,000: Still Well Short of Record High
On Oct. 9, 2007, the DJIA reached a peak at 14,163.53. It had traded above 12,000 for almost all of the previous year. Why was the Dow 18% above today's level, or, more to the point, why has it not come close to its 2007 peak?
The economy was in much better shape in 2007 than it is now, although it was headed for a fall. By March 2009, the Dow had tumbled to 6,626. Clearly, the market did not see the credit crisis coming a year before it hit with full force. Wall Street experts often say that stock market prices anticipate the economy a year ahead of time. If that's so, the Dow missed the mark in 2007. The index was set on the strength of the economy in 2007 and not the pending trouble.
The potential market danger to the Dow is not just that it's back at 12,000, but that it got there so quickly. It's up 85% in 22 months. The peak in 2007 was the result of a longer, slower climb. That means the 12,000 level is probably fragile and could be undermined if many of the economic expectations built into the rally don't come true.
The enemies of the market now are few but powerful. Inflation could erode American buying power, particularly if wages and corporate margins can't keep up with prices. An unemployment rate above 9% won't sustain an extended recovery -- the number is too high to allow for a sharp rebound in overall consumer spending.
And, of course, a number of events beyond America's control could topple market confidence. The debt crisis in Europe is on that list. So is the possibility that the political upheaval in the Middle East could spread, undermining sovereign debt in the region and disrupting trade.
The DJIA is well short of 14,000, and based on the risks of the year ahead, it should be.