Dow 17K!
That’s the rallying cry from analysts and traders on the Street.
Before you scoff, consider this: The Dow Jones industrial average already has soared more than 86 percent from the crisis lows of spring 2009, when the index stood at 6,627 as the “green shoots” started blooming.
Despite the rest of the economy, or perhaps because of it, equities are soaring.
Now, two market forecasters are predicting another market rally — one that will lift the Dow 4,000 points from its Friday close of 13,207.
Wharton School professor Jeremy Siegel argues there’s a 50 percent chance — or better — of the Dow tipping 17,000 by the time the president takes the oath of office. Siegel says stocks are reasonably priced — in fact, the cheapest they’ve been since the 1950s.
The S&P’s price-earnings ratio is at 16, down from its high in May 2009 of 124.
Richard Bernstein, a former Merrill Lynch chief investment strategist, goes even further.
He says the US is at the beginning of a 10-year bull market in equities. Bernstein notes how the S&P 500 index has outperformed the fabled Brazilian, Russian, Indian and Chinese stock markets for the past four years as market fundamentals continue to improve.
Key reasons for the surge in equity values that are often cited:
* More easing by central banks to accommodate slow growth.
* Individual investors coming back into equities.
* Equities having the greatest return in an ultra-low interest rate environment.
Of course, there are doubters.
In the classic phrase of prospectuses, past performance is no guarantee of future gains. And it’s not a sure thing that governments will spend more money, or consumers will buy more stock.
In their view, the next high-speed market train-wreck is just around the corner — and it’ll be the big one.
This meltdown could be the mother of all disasters — the recent Knight Capital Group catastrophe would seem like a dress rehearsal by comparison, these analysts warn.
“I am very concerned that a lot of the trading volume today is illusory in nature and not based on the actual buying of securities,” said Graham Summers, chief market strategist at Phoenix Capital Research. “The volume is based instead on high-frequency traders bidding up prices that do not actually result in real transactional volume.”
The same high-frequency trading shenanigans that contributed massively to the 2010 Flash Crash market meltdown are propelling the Dow to dangerous, phantom new highs. That will set up the next electronic-driven crash landing, these analysts say.
High-frequency traders account for more than half the volume in US stock trading, TABB Group says. That’s as much as 70 percent on some individual stocks, other analysts estimate.
These traders include large brokerages and investment firms, and other rapid-fire players like Knight Capital. And they trade stocks at blinding speed — in microseconds. (The 1990s electronic day traders were buy-and-hold investors by comparison.)
Knight is the latest casualty of the high-speed highways. Earlier this month, it lost $440 million in less than an hour because of a snafu in Knight’s trading software. The loss forced Knight to seek emergency funding to stay solvent.
Summers is skeptical of a 17,000 Dow. “We have already seen investors pulling tens of billions of dollars out of US equity mutual funds,” he said.
“So if stocks are undervalued, who are they undervalued for? Because [retail investors] are not buying them.”
Critics say it’ll be mostly the high-frequency traders “artifically” buying and selling multiple times in some stocks in short time spurts that will send the Dow higher.
“There is now almost a generation of people who question the legitimacy of our markets,” said Andy Brooks, head of equity trading at money manager T. Rowe Price. “There’s the strong sense that they are like a casino — not the impression we want to make.”
This is a casino for losers, some say. With untamed technology at its heart, they fear another disaster could inflict unprecedented pain.
“This pursuit of speed and volume has been ruthless,” said Brooks. “I am certain as an industry we need to put more safeguards in place.”