The Dow Jones Industrial Average closed at its highest level ever Tuesday — ending with a new high of 14,253.77, more than 100 points above the 14,164.52 record last hit in October 2007. See: U.S. stocks rally to lift Dow to new heights.
While that new all-time high may just be a number — the market didn’t undergo a magical transformation upon hitting pre-crisis levels — experts say such milestones can have a psychological impact on investors. As the Dow reclaims lost ground, some investors are reflecting on how far they’ve come since the financial crisis. Some are still trying to bounce back, but many have recovered what they lost in the crash of 2008. The average participant in a 401(k) plan broke even between 2007 and 2010, and many savers are now better off than they were in 2007, according to Vanguard. The average account balance was $86,000 at the end of 2012, 10% more than the average balance at the end of 2007. (Of course, those higher balances include investor contributions, not just market gains.) See: What’s the big deal about the 2007 highs?
But for all the investor excitement around market milestones, investing pros say these thresholds don’t really move markets too much up or down. While investors often get swept away when the market is near key thresholds — causing them to ignore important factors like stock valuations — analysts say monetary policy and economic growth drive markets. Indeed, some investing pros are skeptical about how long the run will last. See: Druckenmiller says ‘it’s going to end very badly.’
Here’s a look back at some of the Dow’s biggest milestones, what happened next — and what lessons were learned.
Dow 5,000
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Nov. 21, 1995
What the pros predicted: When the Dow crossed the 5,000 mark for the first time in November 1995, President Bill Clinton was in his second year of office, the U.S. was coming out of a recession, and the world was buzzing about the newly launched World Wide Web. With the Dow having crossed 4,000 just nine months before, pros expected more rally ahead.
What happened: The threat of another recession interrupted some of that rally, but the U.S. recovered and technology stocks took off as anticipated. By Valentine’s Day 1997, the Dow had topped 7,000.
Lesson for investors: Watch trading volume. While stocks kept increasing, experts say it was a minority of investors pushing stocks higher. In other words, if the broader market isn’t behind a move up, it may not be sustainable.
Dow 10,000
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March 29, 1999
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What the pros predicted: Investors bedazzled by the Internet began to dump other quality stocks to get a piece of the technology sector, driving the Dow above 10,000 for the first time in March 1999. Some pros began to question whether traditional measures like valuations, which showed that stocks were beginning to get expensive, would still matter in a post-web world where stocks were expected to keep soaring.
What happened: The tech bubble burst and stocks peaked at 11,723 in January 2000. The Dow tumbled in the following years, bottoming out at roughly 7,200 in October 2002.
Lesson for investors: Don’t ignore valuations, say investing pros. The fact that the rally was led by two sectors — technology and telecom — should have been a warning sign that the rally probably wouldn’t last. Financial advisers also recommend that investors have a sell strategy for taking profits and cutting losses when stocks are on their way down.
Dow 12,000
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Oct. 19, 2006
What the pros predicted: The Dow had risen 12% so far that year, as both regular investors and fund managers loaded up on blue chips. And while some investing pros raised red flags about the slumping housing market (it was also the 19th anniversary of the 1987 stock-market crash), many other analysts and fund managers said the rise would continue so long as inflation and interest rates remained in check.
What happened: Stocks would shoot up another whopping 2,000 points over the next nine months, peaking at about 14,000.
Lesson for investors: When formerly jittery investors throw caution to the wind and starting snapping up stocks, analysts say, the market may be due for a correction — or a crash. By mid-2008, stocks would be begin their steep descent back down (see next slide) and the U.S. would see its worst downturn since the Great Depression.
Dow 13,000
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April 25, 2007
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What the pros predicted: After the Dow doubled in five years to reach 13,000 in April 2007, investors were emboldened by a growing global economy, a booming housing market and low interest rates. Optimistic investors briefly pushed the Dow to 14,000 just three months later and many expected the run to continue.
What happened: The housing market collapsed and the credit crunch took a toll on businesses, causing stocks to take a 50% dive by March 2009. Unemployment soared, forcing many investors to pull out of stocks and lock in their losses.
Lesson for investors: High levels of debt, at both the individual and business level, can weigh down the economy, say experts. Many investors also ignored signs that pointed to a strained housing market. Advisers say investors should remember to scrutinize companies’ balance sheets to prioritize low debt and strong balance sheets.
Dow 14,000
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July 19, 2007
What the pros predicted: After the Dow topped two major milestones in nine months, some investors viewed 14,000 as just another notch in the market’s steady climb up. Encouraged by strong corporate profits, many continued to buy stocks.
What happened: The Dow’s reign above 14,000 was fleeting. Early signs of the credit crisis sent stocks tumbling soon after — and the index plunged below 12,000 in the months that followed. The Dow hit 13,000 again in 2008 before stocks plummeted to a low of 6,547 in March 2009.
Lesson for investors: Many of the largest market moves happened on days when trading volume was low, a sign the gains were artificial, pros say. Investors learned the degree to which high oil prices, a weakening mortgage market and economic uncertainty could take their toll on stocks.
