Where Does the Dow Go Now?

Jan. 9, 2006 — -- In the first week of trading for 2006, the Dow and the Standard & Poor's 500 index posted the best weekly percentage gains in seven months. The Nasdaq Composite index had its best week since August 2004. The Dow Jones Industrial Average was up for the first five trading days of 2006, and the Dow closed above 11,000 on Monday for the first time since before the Sept. 11 terrorist attacks.

So are the strong market numbers here to stay, or will the spike be brief? ABC News' personal finance expert Mellody Hobson weighs in.

What is responsible for the market rally?
Falling oil prices and the Federal Reserve signaling that it may be done raising rates have led to the market rally. Additionally, specific industries (home builders, automakers and consumer stocks) reported good numbers, which also helped lift the market.

Put this in perspective for us -- what is the significance of 11,000?
The last time the Dow finished above 11,000 was June 7, 2001. The Dow's all-time high was on Jan. 14, 2000, when it closed at 11,722.98 -- that number is more significant. In fact, the Dow is still 6 percent below that all-time high.

However, 11,000 is still a milestone and symbolizes that our economy is robust and is moving in the right direction. Think of 11,000 as more psychological than economic.

But remember, it is only a number! It should not lead people to believe it is anything more than it is.

What does this mean for investors?
We might see a continued rally because of euphoria and emotion driving the market. But over the long term, stocks trade on the fundamentals of business and the U.S. economy. That is what really matters. Before people go wild, keep in mind stocks are still off their exuberant highs of the dot-com bubble. In fact, the S&P 500 and Nasdaq are about 20 percent and 60 percent below their respective March 2000 peaks.

Is 11,000 here to stay?
I am more cautious about this market. I am not sure 11,000 will stick. The reasons: I have concerns about inflation in everything from homes to oil (still high at more than $60 a barrel) to consumer products.

For example, Clorox just announced it is raising prices on everything from Glad Bags to bleach. Ultimately, the dollar is not going as far as it used to, which crimps consumer spending.

Also, even though the market is off its high, we have had a tremendous run. We have seen incredible returns. That makes me think trees do not grow to the sky. And finally, I am worried about corporate earnings, because the comparisons are going to be much harder now. When you compare against a tough year, it is easy to look better. After such a strong run for many companies, it is now going to be much harder to show big year-over-year profits.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is ABC News' personal finance expert. Matthew Yale and Aimee Z. Daley contributed to this report.