The Dow Jones industrial average summited its first fourteener Tuesday before retreating lower.
But bullish investors say the index will close above 14,000 soon, despite a housing slump, rising pressures on consumer finances and turmoil in the bond markets.
The index of 30 blue-chip companies reached as high as 14,021.95 before sliding in the last hour to close the day at 13,971.55, the fourth record close the index has set in as many trading days.
“The economy is very good overall, the earnings of companies are really terrific, and the whole market is still undervalued,” said Sacha Millstone, a senior vice president with the Millstone Evans Group of Raymond James & Associates Inc. in Boulder.
A report showing that wholesale inflation fell 0.2 percent in June was among the news items that lifted stock prices Tuesday.
With inflation under control, investors are betting that the Federal Reserve will hold the line on interest rates, making it less likely that tighter credit markets will choke off consumer spending.
The bullish case for a Dow over 14,000 also argues that second-quarter corporate profits will grow at a significantly higher rate than the 4.1 percent or so analysts are predicting, said John Claxton, a financial consultant with RBC Dain Rauscher in Denver.
“U.S. multinationals are enjoying nice profits, and earnings are up,” Claxton said. “The large- cap stocks are going to be the better performers.”
About 30 percent of earnings at U.S.-based corporations now come from overseas business, said Richard Hoyt, a market strategist with KDV Wealth Management in Minneapolis.
Economies in Europe and Asia are growing faster than that of the U.S., which rose 0.7 percent in the first quarter.
As those overseas profits are converted into a weaker U.S. dollar, they are magnified. U.S. manufacturers also get a boost as their products become cheaper to foreign buyers.
Hoyt predicts second-quarter profits will rise 8 percent to 10 percent, fueling additional gains in stock values. He and other bulls also expect the economy will show significantly more growth in the second quarter than it did in the first.
Bulls also argue that compared with historical averages, U.S. stocks remain undervalued and represent a more attractive investment than bonds or real estate.
Millstone said pessimists still outnumber optimists, leaving a large pool of future buyers to fuel future gains in the market.
If everyone were invested in the market and predicting only blue skies, she would be concerned. But that isn’t the case.
“Nobody has been optimistic since 2001. But the market is telling you a different story,” Millstone said. “People should listen to the market.”
Patricia Ryan, a finance professor at Colorado State University in Fort Collins, said compelling arguments on both sides are out there, making it a dangerous time for anyone to try and forecast what will happen next.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
