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A trader smiles Tuesday as he works at his post on the floor of the New York Stock Exchange. The Dow Jones industrial closed the day at a record high, representing a remarkable comeback for the stock market. The Dow has more than doubled since falling to a low of 6,547 in March 9, 2009, following the financial crisis and the onset of the Great Recession. AP Photo by Richard Drew

Dow hits record, erases trillions lost in the Great Recession

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NEW YORK — The stock market is back.

Five and a half years after the start of a frightening drop that erased $11 trillion from stock portfolios and made investors despair of ever getting their money back, the Dow Jones industrial average has regained all the losses suffered during the Great Recession and reached a new high. The blue-chip index rose 125.95 points Tuesday and closed at 14,253.77, topping the previous record of 14,164.53 on Oct. 9, 2007, by 89.24 points.

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“It signals that things are getting back to normal,” says Nicolas Colas, chief market strategist at BNY ConvergEx, a brokerage. “Unemployment is too high, economic growth too sluggish, but stocks are anticipating improvement.”

The new record suggests investors who did not panic and sell stocks in the 2008-09 financial crisis have fully recovered. Those who have reinvested dividends or added to their holdings have done even better. Since bottoming at 6,547.05 on March 9, 2009, the Dow has risen 7,706.72 points or 118 percent.

The Dow record does not include the impact of inflation. Adjusted for that, the Dow would have to reach 15,502 to match its old record.

The Standard and Poor’s 500, a broader index, closed at 1,539.79, 25.36 points from its record.

The last time the Dow hit a record, George W. Bush still had another year as president, Apple had just sold its first iPhone, and Lehman Brothers was still in business.

But unemployment was also 4.7 percent versus 7.9 percent today, a reminder that stock gains have proved no elixir for the economy.

Still, the Dow high is another sign that the nation is slowly healing after the worst recession since the 1930s. It comes as car sales are at a five-year high, home prices are rising, and U.S. companies continue to report big profits.

The stock gains have helped retirement and brokerage accounts held by many Americans recover. That, in turn, has helped push U.S. household wealth nearly back to its peak before the recession, though many in the middle class are still deep in the hole. Most middle-class wealth is tied up in home values, which are still a third below their peak.

Good economic news Tuesday helped lift stocks. Retail sales in the 17 European countries that use the euro rose faster than expected, China’s government said it would support ambitious growth targets, and a report showed U.S. service companies grew last month at their fastest pace in a year.

“It feels great,” says Marty Leclerc, chief investment officer at Barrack Yard Advisors, an investment firm. In early 2009, when stocks were plummeting, “it looked like Armageddon was nigh. It’s a lot more fun to be in a rising market.”

In the depths of the recession four years ago, few investors would have predicted such a fast recovery. Some feared another Great Depression. Banks were collapsing, lending was frozen, world trade was plunging, and stocks were in free fall.

“People thought we were going to relive the 1930s,” says Robert Buckland, chief global stock strategist at Citigroup. He calls the stock gains since “pretty remarkable.”

From its peak in October 2007 to its bottom in March 2009, the Dow fell 54 percent. That was far less than the nearly 90 percent drop in the Great Depression but scary nonetheless. There had been 11 previous bear markets since World War II and none had reached 50 percent.

One man who stayed calm and didn’t sell was Jay Sachs, 70, a retired computer consultant. In fact, as others scrambled to exit stocks in late 2008, he plunged in more — scooping up drug maker Ely Lilly and Co., health-care products giant Johnson & Johnson and food company General Mills.

“You have to be greedy when others are fearful,” he says, quoting a famous line from billionaire Warren Buffett, who also bought in the panic. Sachs adds, “People are still fearful and that’s a good sign. There’s room for growth.”

He says his portfolio has doubled in value in four years.

As stock rebounds go, this has been an unusually quiet and uncelebrated one. Typically, bull markets are accompanied by rising trading volume, a surge in young companies going public and Internet chatter over hot stocks.

The past four years, none of that has happened.

Adding to the chastened mood is lingering fear among many investors that stock gains can disappear in a flash. Burned by two stock-market crashes in less than a decade, Americans have sold more U.S. stocks than they’ve bought the past four years, nearly unprecedented in a bull market since World War II.

In this run-up, nearly all the buying has come from companies repurchasing their own stock in an effort to boost its value. Companies in the S&P 500 have bought $1.5 trillion since the Great Recession began in December 2007.

In the recession, household wealth fell $18.9 trillion, or 28 percent, as the prices of assets like stocks and homes tumbled.

But after bottoming in the first quarter of 2009 at $48.5 trillion, wealth rose $16 trillion through the third quarter of last year and was within striking distance of its peak of $67.4 trillion, according to the latest data from the Federal Reserve. Gains since then may have pushed wealth to a new high.

Middle-class households have not recovered as much as those numbers suggest because most of their wealth is tied up in their homes, and home values haven’t bounced back like 401(k) accounts.

Homes accounted for two-thirds of middle-class assets before the recession, estimates economist Edward Wolff of New York University. By contrast, they accounted for one-third of assets of all U.S. households. Stocks were 7 percent of middle-class assets, less than half the percentage for all.

The rich have been the biggest winners of this bull market. Eighty percent of all stocks are held by the wealthiest 10 percent of households.

To stock bulls, the economy is on the verge of what Bernanke calls “escape velocity,” a self-sustaining pace of growth and better than the sluggish 1-2.5 percent of the past three years. Faster economic growth would boost corporate earnings, which would lead to higher stock prices.

Of course, if investing was as simple as looking up interest rates and stock valuations, we’d all be rich. Plenty can go wrong.

For starters, future earnings, the biggest driver of stock prices, could prove disappointing. Financial analysts expect earnings for the S&P 500 to grow a healthy 8 percent this year, according to FactSet. Most of that increase is expected in the last half when they assume economic growth accelerates.

Will that happen? It’s anyone’s guess, and financial analysts are often too bullish. A year ago, they expected a 13 percent jump in earnings in the last three months of 2012. They got 4 percent instead.

Investors also need to pay attention to what’s happening in the rest of the world. Big U.S. companies generate nearly half their revenue from overseas. The 17 European countries that use the euro as a currency have been in recession for more than a year. Japan, the world’s third-largest economy, fell into one late last year. Stock markets tend to look ahead, so what matters is whether the recessions deepen in Europe and Japan or those economies start growing again.

Another worry is what will happen after the Federal Reserve stops stimulating the U.S. economy. Last month, minutes of the Fed’s last policy meeting were released, and they showed members disagreeing on when to stop. The Dow lost 155 points in two days.

Jeff Sica, founder of money manager Sica Wealth Management, says the rising market is good because it’s a sign of confidence. But he fears stocks could sink when the Fed stops buying bonds.

It’s a big “psychological reason the market is going up,” he says. “People know the Fed will continue to inflate assets.”

The Fed stimulus was in response to the worst economic recession since the 1930s.

The Great Recession began in December 2007, two months after the Dow and S&P 500 reached their peaks in October. It was triggered by a drop in home prices that hammered consumers and banks. Nine months later, in September 2008, Lehman Brothers declared bankruptcy and lending froze worldwide.

Panicked investors began pulling money out of stocks. Prices, which had been falling slowly, nosedived. By March 9, 2009, the Dow had fallen 54 percent and the S&P 500 57 percent.

In the turbulent journey to new highs, Wall Street strategists and other experts have predicted many times that small investors were about to fall in love again with stocks. The “dry powder” of their money would set fire to an already hot market. After all, small investors had helped push stocks up in the great bull market of the ‘80s, which began in August 1982. Those who had left the market years earlier began buying again, and stocks more than tripled in five years.

They drove a bull market again in the 1990s. Stocks more than quintupled in 9 ½ years.

But small investors have not only stayed away the past four years, they have sold hundreds of billions of dollars of stocks.

Then, in January, as the Dow inched closer to its record, individual investors seemed to have second thoughts. They put nearly $20 billion more into U.S. stock mutual funds than they took out in January, according to the Investment Company Institute, a trade group for funds.

It was just a trickle, but it may have helped stocks surge. In January, the Dow rose 5.8 percent, and the S&P 500 rose 5 percent. It was the best start to a year for the Dow since 1994.

For good or ill, it’s possible the Dow’s new high might convince investors to put more money into stocks.

“When you hear about new highs, the greed factor kicks in,” says Colas, the BNY ConvergEx strategist. “It gets people to think, ‘Do I own enough stocks?’”

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