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Mon., Sep. 1, 2014
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Dow scores hat trick with Thursday close The longtime market bellwether hit a new record for the third straight day, but the question, local analysts say, is whether the rising stock-market tide is sustainable.

By Lee Howard

Publication: The Day


Some say records a sign of things to come, while others warn surge could be short lived

Another day, another record for the stock market.

The Dow Jones industrial average, a longtime market bellwether that provides a glimpse at the performance of major companies on the New York Stock Exchange, finished trading Thursday at a record level of 14,329.49.

That's 33.25 points higher than Wednesday's close, about a quarter-percent increase. It's also the third straight day that the Dow Jones average of 30 blue-chip stocks has hit a new record.

"It's a milestone that gets people interested," said Bill Middleton, principal of Mystic-based Sound Portfolio Advisors. "But I'm not sure how significant it is in the long term."

The question, he and others said, is whether the rising stock-market tide is sustainable. Middleton thinks it is and wouldn't be surprised if the market doubled again in the next five years - after more than doubling since the Dow Jones index hit a low of 6,469.95 on March 6, 2009.

But others are not so sure. Bob Henderson, principal of Lansdowne Wealth Management in Mystic, said he believes an adrenaline rush is pumping up the markets. He said major boosts in corporate earnings are starting to slow and that many of the gains in the past were driven by layoffs, which cannot be maintained indefinitely.

"I don't see a lot of strong economic indicators to support such a sustained rally," he said.

Still, Tom McGuigan, principal at Exencial Wealth Advisors in Old Lyme, pointed out that the average investor is only now starting to recognize that a rally is under way. It was only in the past two months, he said, that mutual-fund investors became net buyers of stocks; for the previous three years, even as the market turned upward, most small investors were taking their money out of equities.

"We don't think stocks are overvalued," McGuigan said.

McGuigan pointed out that the Standard & Poors 500 index, which takes into account a wide variety of stocks, is roughly at the same level as it was four years ago, even though companies' operating profits are 17.5 percent higher now.

"That's a really interesting indicator that stocks probably are not overbought," he said.

It's also an indication that the Federal Reserve's policy of "quantitative easing" is working, local analysts said. The policy involves aggressive government efforts to snap up bonds, thereby keeping interest rates low and giving investors few attractive places to put their money other than the stock market.

"It works the way it should - by taking other options off the table," Middleton said.

Among of the biggest buyers of stocks over the past few years have been corporations themselves. According to an Associated Press analysis, the 500 companies that make up the S&P index have purchased $1.5 trillion worth of stock since the end of 2007, which is acknowledged as the beginning of the Great Recession.

While some analysts saw the buybacks as a way for companies to boost lagging stock prices, Middleton said the programs also were smart investments by executives such as Warren Buffett who knew they were purchasing underpriced assets.

Now that small investors are discovering stocks again, some analysts are concerned that the trend could presage yet another stock pullback.

"I wouldn't exactly call the market a screaming buy," Henderson said.

But Middleton said a lot of money is still sitting on the sidelines, and that several powerful drivers of the market - higher housing prices and improving employment numbers among them - are still in the early stages of a turnaround. Once these economic indicators start boosting growth, the market could see even more explosive records, he said.

Of course, there are a few clouds on the horizon - including the effects of budget cuts required by sequestration and a probable battle in Congress over the debt ceiling - but the market has essentially shrugged off such concerns, analysts said.

Both large and small stocks in the United States are up between 6 percent and 9 percent so far this year. International stocks have risen about half as much, while emerging markets are actually down slightly so far this year.

Financial advisers said they are recommending clients to be broadly diversified this year, though some suggest going light on U.S. Treasuries because of the low yields and risk that rising interest rates will lower the value of bonds.

Henderson said investors will have to brace for a major market correction at some point.

"There are not a lot of attractive places to invest right now," he said.

And, as Middleton said, sometimes bumps in the economic road come when investors least expect it.

"Investments are like blue jeans," he said. "They get most comfortable right before they give out."

l.howard@theday.com


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