The US stock market is finally nearing the peak levels it reached in 2000 – before a recession, terrorist attacks, and surging oil prices exacted a toll on American financial wealth.
As bull markets go, this one has been slow and faltering, but the comeback is nearly complete.
In the past two months, the Dow Jones Industrial Average has jumped about 8 percent. It's welcome news for investors, but more broadly it reflects a vote of confidence for America's economy at a delicate time.
Some economists worry about a possible recession, especially if the housing market stumbles badly. Others fear that inflation will persist. But the stock market is riding on hope of a more moderate outcome: that the economy can continue growing, if perhaps more slowly, as a housing boom fades and inflationary forces diminish. A recent drop in oil and gasoline prices has bouyed those hopes.
"The background in the economy is pretty good," says Michael Cosgrove, who publishes the Econoclast, a market newsletter based in Dallas. If it stays that way, he says stocks could hit new highs and "we could have a pretty good run in 2007."
If this week's performance matches last week's, the Dow Jones Industrial Average will push through a kind of millennial milestone – the 11722.98 peak reached on Jan. 14, 2000.
The widely watched index of 30 major stocks closed last week at 11560.77, just 162 points or 1.4 percent away from matching its old record. The broader Standard & Poor's 500 stock index was still about 10 percent off its early-2000 level.
Analysts are divided over just how far the current bull run might go. Some say a string of record corporate profits is bound to end as the economy cools. Others say the presence of such bearish sentiment could provide a backdrop for some good gains.
"There's a pretty well-rehearsed bearish story out there," says Max Bublitz, chief strategist of Seneca Capital Management, an investment firm in San Francisco. But that story, he says, is "a little shopworn."
His forecast is for solid but unexciting gains in the short term and next year.
"What we are is kind of defensively bullish," he says. He reckons the S&P 500 index could end this year at around 1360 and next year at 1450, for a price gain of about 9 percent in 15 months.
The bearish view points to a range of challenges: a likely slowdown in corporate profits, uncertainty about the economy and inflation, past history of market declines during the fall months, and concern about US elections or flash points in the Middle East.
Factors such as those have been holding investor sentiment in check. In one way, that could be good news. Stock prices often "climb a wall of worry," in Wall Street- jargon, when investors gradually overcome a pessimistic trading environment to generate marked gains.
By contrast, strong bullish sentiment can be a sign of a market reaching its upper limit.
There's certainly been no such frenzy in this bull market, which will celebrate its fourth birthday in October, according to Standard & Poor's. The bull began its upward climb late in 2002 as the economy was struggling to find its feet after the dotcom stock bust and the Sept. 11 attacks. After a sharp initial rise of nearly 30 percent in 2003, US stocks have risen slowly even as corporate profits have soared.
Normally, over the long term, share price gains are closely related to corporate profits, which in turn depend heavily on the performance of the US and world economy.
But stocks hit such a high peak in 2000 that it has taken a long time to reestablish equilibrium.
"We think that the market's fairly valued," says Sam Stovall, chief investment strategist at S&P in New York. "In this period of increased risk, investors are not willing to pay up for stocks."
Standard & Poor's forecasters predict that the S&P 500 will end the year at 1315, slightly below its Friday close.
At that level, the stocks will be valued at about 15 times their actual earnings for the calendar year.
S&P expects its index, which covers 500 of America's largest companies, to gain about 9 percent in price next year.
"I'm a single-digit bull," not a raging bull, says Mr. Stovall.
Indeed, he acknowledges that a record string of 17 quarters of double-digit earnings growth by the companies in the S&P index may be nearing its end. Perhaps two more quarters of such gains remain.
Richard Bernstein, chief strategist at the investment house Merrill Lynch, talks of an outright "profits recession" next year, with earnings growth turning negative for a time as companies face a cooler economy.
The firm recommends that investors devote a bit less of their money to stocks than usual – 50 percent instead of 60 percent – with the remainder in bonds and cash. Mr. Bublitz, by contrast, recommends putting more like 65 percent in stocks.
Amid the debate over where the market will head next, some recent economic news has been reassuring. An inflation report on Friday was subdued, offering hope that the Federal Reserve won't have to raise interest rates when it meets this week – and that the Fed's rate-tightening may have ended.
But Mr. Cosgrove, the Dallas economist, cautions that when the S&P 500 index is adjusted for inflation, it is still only halfway back to its 2000 peak. Stocks remain the best place to invest, he says, but the decade may be done before the S&P's price is again at its inflation-adjusted 2000 level.