September 28, 2009

Economic Outlook: Bulls look at 10,000

The best known U.S. market index, Dow Jones industrial average, has a chance to reclaim numerical glory this week, at least symbolically.

The Dow took a run at 10,000 points last week but sputtered, slipped -- and basically choked -- 100 points shy of the mark. Abstract or not, it was a touch embarrassing.

In the background, White House officials were patting themselves on the back for the market's ability to weather the historic squalls of 2008 year ago. Fed Chairman Ben Bernanke all but declared the recession over, saying the U.S. had presumably returned to growth. A lot of huffing and puffing on what next? was in the air, as the Group of 20 summit was planned for the end of the week.

The mighty DJIA, meanwhile, like Casey at the Bat, took three hefty swings at 10,000 points three days running and merely whiffed.

Investors were not only separating the wheat from the chaff, they were separating the rhetoric from the fundamentals. Behind some negative numbers -- durable goods orders dropped 2.4 percent in August -- were some positive patterns, including a 2.7 percent increase in retail sales in the same month.

Behind some positive numbers -- new home sales rose 0.7 percent in August -- were some distressing considerations, such as that they rose a lot faster the month before, 9.6 percent.

As the housing market goes, so goes the Great Recession. It's not exactly a light housing bubble; it's more like having that 800-pound gorilla stomping around, occasionally napping, occasionally waking up to destroy the living room.

The long and the short is that markets are showing some strength in an oblique fashion lately. When the financial crisis was developing a year ago and a hard gust might have toppled the nation's largest banks, all the U.S. Federal Reserve had to do to add 200 points to the Dow Jones industrial average was wink, flinch, or suggest it might cut interest rates. Last week, however, when the Fed left interest rates unchanged, U.S. markets turned abruptly lower.

Similarly, when President Barack Obama went to New York before the G20 summit to scold bankers for their reckless ways, the market turned up, not down.

Investors, it seems, are paying attention to fundamentals, not rhetoric. And maybe that's the definition of confidence that was lacking a year ago.

That means, the symbolic 10,000 point mark will crumble when the fundamentals are right -- unless investors just want to bull through the barrier on their own.

The DJIA first closed above 10,000 points March 29, 1999. It hit its peak at 14,164.53 Oct. 9, 2007. It hit its 2009 low at 7,062.93 in March.