Long way from dog days: 2011 might see record Dow

NEW YORK - Could the Dow set a record high next year?

That question would have seemed crazy early last year when fear and panic enveloped the stock market and the Dow Jones industrial average plunged to 6,547 on March 9. Many investors thought it would take a decade or longer to get back to the record of 14,165, set on Oct. 9, 2007.

Now, we could be on the verge. The Dow has soared 76 percent the past 21 months, and it would have to climb only about 23 percent from Friday's close of 11,492 to set a record.

That's a big jump, but the Dow has risen 23 percent or more six times since 1985, or roughly one in four years. Two other years, the Dow just missed with a gain of 22.6 percent. Add them, and the number becomes eight years out of 25, or roughly one in three.

Many analysts don't expect a 23 percent gain in 2011, but they agree conditions are in place for the rally to continue.

"There are some really compelling reasons out there that say the Dow could approach its highs," says Randy Bateman, chief investment officer for Huntington Asset Advisors. "You've got a fairly rosy scenario, where there isn't a whole lot of competition for stocks."

Corporate bonds provide decent income but lack the potential of stocks to appreciate. Interest rates on cash investments, such as bank CDs and money-market mutual funds, remain in the basement. Meanwhile, corporate earnings keep rising, which makes stocks more appealing. Companies also are sitting on a record amount of cash, giving them leeway to pay bigger dividends, buy their own stock or buy competitors.

The economy could help, too. The Great Recession ended in June of last year, so this economic expansion is one and a half years old. Expansions since World War II have lasted an average of nearly five years. The Dow doesn't always rise the year a recovery marks its second anniversary. But the last time it did so, in 2003, the Dow jumped 25 percent. This expansion has been fitful so far. If it gains traction next year, stocks could do well.

The Dow has had a good run this year. It's up 10 percent despite serious problems in the economy, including a 9.8 percent unemployment rate and a weak housing market. Part of the reason is that stock investors focus more on what's ahead than what's happening now. They believe the economy will continue to heal next year and companies will keep earning more money.

Many analysts expect corporate profits will keep rising - and stock prices with them - but not at a rate that would send the Dow past 14,000 next year. Bank of America Merrill Lynch expects earnings per share for the big companies in the Standard & Poor's 500 index to rise 9 percent in 2011 and 6 percent in 2012. It sees the S&P rising 13 percent in 2011 from Friday's close.

"Nothing's impossible, but it's not real probable," says Bob Millen, a portfolio manager of the Jensen Portfolio mutual fund.

Huntington's Bateman, who says the Dow could reach a record in 2011, warns stocks may not stay that high for long. Larger government deficits, he says, could drive stock prices lower in 2012 or 2013.

by Stan Choe Associated Press Dec. 20, 2010 05:38 PM




Long way from dog days: 2011 might see record Dow