Dow's 11,000 close not a major event but is a good sign

Whether it's just psychological or actual good news for businesses and workers, the 11,000 milestone reached again Monday in the Dow is still a boost compared to one of the most brutal recessions in modern times.

The Dow's breakthrough, local economists say, reflects that massive economic stimulus and the optimism it generates have taken hold, at least for a while.

The return of such milestones is a feel-good event, experts say, but it also heralds the return of many of the investors who bailed out about a year and a half ago.

"We're already in the sixth inning of a Bullish game," says David Klein of Long Grove, senior vice president/financial consultant for RBC Wealth Management in Vernon Hills.

The Dow Jones industrial average climbed 20 points Monday to close at 11,006 and the Standard & Poor's 500 index neared 1,200.

The Dow is coming off its sixth straight weekly gain and is at its highest level in 18 months. The Dow climbed above 11,000 Friday for the first time since September 2008, but then closed 3 points down.

This is territory the Dow hasn't seen for nearly two years. After reaching above the 13,000s in May 2008, the Dow soon began a steep plunge, falling to nearly 6,500 about 13 months ago.

Economists like Klein say that people who now are making or recovering money feel more positive, and perhaps more wealthy, and these feelings tend to translate into less fear and more spending.

This impact, coupled with the slowing of declines in residential and commercial real estate, could continue to affect sentiment and boost spending, says Diana Joseph, managing member and chief investment officer for Barrington Strategic Wealth Management Group in Chicago.

"If the confluence of positive news continues, the sentiment could continue to improve and spread to businesses that might then consider hiring more staff," says Joseph.

She says a Business Roundtable Survey released this week indicated that more businesses intend to add, rather than cut, positions.

"However, it will be a long road out of the financial and economic quagmire, marked by periods of good news and periods of bad. So we should keep the balance in mind over the longer term," Joseph says.

The National Bureau of Economic Research, the panel that dates the beginning and end dates of recessions, certainly had that balance in mind Monday as it announced it would be "premature" to declare the recession over.

More investors last year put their money in mutual funds and bonds, not necessarily stocks. That indicates people are still worried. Yet, earnings from companies have been improving and are expected to be better. Payroll jobs are up and more industries are expected to add jobs.

So a lot of positive things have been happening and the market reflects them, David Klein says.

Klein also says the so-called "herd mentality" still exists where many investors get in the market too late, after things have already begun to improve.

"It's human psychology," Klein says. "There's still a lot of money holding on the sidelines."

While the 11,000 mark is a psychological barrier, piercing it still encourages investors, says Jack Ablin of Highland Park, chief investment officer for Harris Bank in Chicago. Then, as companies see their stock prices rising, that encourages more hiring, and that, in turn, spurs more consumer confidence and spending, Ablin says.

"It's like a self-fulfilling prophesy and people respond," Ablin says.

Improvements in economic data from a bottoming of job losses to growing manufacturing and service industry strength help promote investor confidence in the recovery, agrees Thomas Rowen of Bartlett, director of institutional portfolio management for Fifth Third Bank in Chicago.

Investor confidence is greatly influenced by strong improvements in corporate earnings. The fourth quarter of 2009 showed earnings were very strong and analyst expectations for the remainder of 2010 have improved, he points out.

"Investor inflows of cash into stock mutual funds have been increasing over the past few months, illustrating these expectations," says Rowen. "The impact of a strong stock market and the Dow hitting 11,000 are less measurable for average workers. The stock market is a leading economic indicator while employment is a lagging indicator."

The improvements in market performance provide some "light at the end of the tunnel" for workers, many of whom are still suffering from high unemployment, he says.

"Improving corporate earnings and top line revenue growth not only fuel market gains, they increase capital, raise business confidence and create the conditions for new hiring," Rowen says. "Then, average American workers start to experience the benefits."