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With Dow hitting 11,000, what comes next?

Are the markets done roaring?

The Dow Jones Industrial Average closed above 11,000 Monday for the first time in 18 months, capping a 68 percent rise in just over a year. The S&P 500 index came within a point of 1,200.

Many local stock watchers weren't surprised, figuring the huge rally of 2009 still had some legs. Now comes the tricky part.

Often in a frothy bull market, investors take profits at various stages of an upward climb. Steve Athanassie of Trademark Capital in Dunedin predicts markets will soon retract a "healthy" 5 to 10 percent and then head up again.

"Any pullback is going to be shallow and short," echoes Jeff Saut, chief investment strategist at St. Petersburg's Raymond James.

Rodney Johnson of H.S. Dent in Tampa, however, envisions a coming retraction that's a bit more draconian: the Dow at 5,000 by year-end.

With record unemployment and tight credit, "the equity markets seem so out of whack," Johnson said. "We think the rubber band is stretched pretty far at this point."

Confused? Here's what market prognosticators will be watching in the months ahead to get their bearings.

Earnings

Corporate earnings "will really determine whether the markets are going to go higher," said Mike Murray, portfolio manager with Doyle Wealth Management in St. Petersburg. If so, we won't have to wait long to find out. The quarterly flood of earnings begins this week, with many companies projecting higher profits on the back of a scaled-down work force. Profits are the key, Saut said, for companies to start investing in capital expenditures again. That, in turn, is key to hiring more workers, which is key to spurring consumers to spend more.

International markets

European leaders agreed over the weekend to make loans available to Greece to help the country ease its public debt burden. That helped give the markets a little lift Monday. Investors have worried that mounting debt in Greece and other European nations like Spain and Portugal could stunt an economic recovery in Europe and undermine Europe's shared currency, the euro.

Elections

Saut sees potential for the fall elections to become a referendum on the Obama administration's policies. If conservatives make strong headway, he said, it would appease the markets by helping defeat what he called "business killers" like the Cap and Trade anti-global warming initiative and the pro-union Employee Free Choice Act known as Card Check. "You could extend the rally" with the S&P pushing into the 1,500 range, he said. On the other hand, policy changes viewed as anti-business don't always drive the markets down. The markets have generally responded favorably since Obama took office in January 2009, including after the recent passage of health care reform.

Unemployment

The longer this remains a jobless recovery, the greater the likelihood it won't be much of a recovery at all. Few anticipate a fast rise in hiring. But a disappointing national unemployment report in the beginning of May could be devastating, said Johnson of H.S. Dent. It could have a rippling effect in damaging consumer confidence, compounding the housing and credit crises, and upsetting investors.

Government budgets

To Athanassie, the weakness of state budgets loom as one of the biggest wild cards to keeping a bull market intact. Federal stimulus dollars bolstered Florida and other state budgets in the current fiscal year ending June 30. With depleted tax coffers and the end of stimulus funding, the financial stress for many states is expected to be even worse this summer. Johnson said credit-damaged states may have to turn to the federal government to insure their bonds. Just as states have relied on the federal government as backstop for money to hire teachers, build roads and borrow unemployment compensation funds. "How much can we backstop as a nation," Johnson said, "in order to avoid the pain of cutting back to match our new level of income and credit?"

Information from Times wires was used in this report. Jeff Harrington can be reached at jharrington@sptimes.com or (727) 893-8242.

With Dow hitting 11,000, what comes next? 04/12/10 [Last modified: Tuesday, April 13, 2010 11:56am]
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