The Dow Hits a Landmark: 12,000

By
DAN ARNALL
October 18, 2006, 5:50 PM ET
4 min read

Oct. 18, 2006 — -- The Dow Jones industrial average -- the widely watched stock market index -- crossed over the 12,000 mark briefly for the first time in its 110-year history today.

The Dow crossed the threshold twice, before retreating slightly, closing just under 12,000.

The Dow has already set seven closing records in the last two weeks.

Twelve thousand is a major psychological barrier in the history of the stock market, but one with little macroeconomic significance, experts said.

"Round numbers usually have a very psychological significance," said Steve Porpora, floor broker for William O'Neil + Co. "On the way up it can be a barrier to the next leg of a rally, and once it's breached it becomes a support level for trading."

Twelve thousand is a big round number -- one that's just part of a scale that traces its history to 1896, when the Dow was in the mid-40s.

Today's move past the 12,000 mark was in large part a result of traders buying into a benign inflation report released before the market opened.

Profit taking and the fact that not all third-quarter earnings reports are out, may of contributed to the pullback, analyists say.

Figures from the government show that retail prices dropped half a percent last month, thanks in large part to falling energy prices.

This makes it less likely the Federal Reserve will increase interest rates at its meeting next week, buoying interest in stocks.

This most recent rally caps a return from the depths of the dot-com stock bubble burst.

The Dow's 12,000 mark represents a 65 percent increase in value for the index from its low point on Oct. 9, 2002 (7,286.27). Today's number is about 17 percent higher than the Dow's level a year ago.

It's been an incredible -- but slow -- four-year return to new highs, a return that the broader S&P 500 Index (still 10 percent below its record) or the tech-heavy Nasdaq (53 percent below its record) have not matched.

The most significant run-up in the Dow started in the spring of 2003, when the U.S. economy got traction in its postrecession recovery. Between March '03 and February '04, the Dow's value shot up more than 40 percent.

After that, the market stalled -- wavering between 10,000 and 11,000 -- until earlier this year.

What's pushing the Dow up? We're in the midst of earning season, where publicly traded companies tell their investors how much they made in the third quarter.

If companies perform as expected, Q3 2006 will be the 13th consecutive quarter of double-digit profit growth, tying the previous record run for corporate profit growth.

Increasing profits draw money to stocks. Investors buy a stock because they want to own a piece of a company's future profits. Growing earnings like we've seen during the previous three years are a magnet for money.

A dip in the real estate market, which had attracted individual investors during the boom, also helps to buoy the Dow.

People are now putting their money into the stock market instead of second homes and real estate trusts.

Analysts say that we'll likely see the Dow continue to push higher through the end of the year, even as the overall economy continues to slow, thanks to these factors.

What Is the Dow?

The Dow is arguably the best-known stock market index in the world. The number is calculated by Dow Jones and is based on the current trading price of 30 large industrial companies. A list of the current and historic components are available online.

Some interesting facts about the Dow (from Dow Jones Global Index Group):

  • When Charles Dow created the Dow Jones industrial average, first published on May 26, 1896, it consisted of a dozen stocks.
  • Only one of the original 12, General Electric, is in the average today. And even GE dropped out for a while, deleted in 1898 but back nine years later as a replacement for Tennessee Coal & Iron.
  • Several companies in the 1896 average are ancestors of firms active today. American Tobacco was broken up in 1911 but was the progenitor of such companies as Fortune Brands and R.J. ReynoldsTobacco. Distilling & Cattle Feeding Co. became Distilling Co. of America, and later Millennium Chemical. American Sugar evolved into Amstar Holdings, which sold its sugar business to Britain's Tate & Lyle PLC and eventually became part of Sweden's Assa Abloy.
  • Over the years, the number of components included in the average has increased from 12 to 20 to 30 as the U.S. economy has expanded. The Dow's focus has shifted from agricultural products and basic materials such as coal, iron, lead, rubber and leather to technology companies, financial-service providers, manufacturers and retailers.