Wall Street's new high buoys Main Street

Small investors are relieved by the Dow's new record. But some analysts wonder if the good times can last.

Marcia Brier of Needham, Mass., is relieved that the Dow Jones Industrial Average has finally surpassed the high of 6-1/2 years ago. With two children in college, she says the strong market showing "gives me a larger cushion."

Jana Skewes of Chattanooga, Tenn., hopes a resurgent stock market helps her small business, SharedHealth. "Potential customers might be a little looser" with their money, says the president and CEO, "and young companies need that."

And retiree Fred Bona of Boonton, N.J., says the Dow hitting a new record will help his retirement nest egg. "When it's going up, it's wonderful. And when it's going down, it makes you nervous."

Yes, the reaction on Main Street to a new Dow record – 11,727.34, only 4.36 points over the old record – is one of relief. A hurdle cleared. Perhaps an indication that the gloom and doom that often emanates from Wall Street professionals may not come true. And, perhaps a way to make money even if home valuations are now going the opposite way.

"It helps to remind people why they own stocks," says Alec Young, a strategist at Standard & Poor's in New York. "It's a good thing psychologically."

The Dow's resurgence, some analysts believe, reflects the shifting investment landscape and perhaps some improvement in the investment climate.

"There is some shifting away from real estate and into the stock market," says Peter Morici, a professor at the Robert Smith School of Business at the University of Maryland in College Park. "If you're not buying houses and your personal income is up, you have to be doing something with your money."

At the same time, says Mr. Young, the international geopolitical climate has improved. So far, many of the dire predictions of war spreading in the Middle East have not come to pass. The relative peace in the region has helped to bring down oil prices. Wednesday, oil was trading below $60 a barrel. "If it continues to fall, that helps," says Young. If it falls to $55 a barrel, stock prices could rise more, he adds.

The Dow's rise also comes at a time when Wall Street is anticipating a change in course by the Federal Reserve Board. By this spring, some analysts believe the Fed will start to cut interest rates as the economy slows. "The consensus is for the first rate cut in early 2007," says Lew Piantedosi, co-manager of the Eaton Vance Large-Cap Growth Fund in Boston. "Typically, when the Fed eases off the short-term rates, it's a pretty bullish indicator for stocks."

In the recent past, the Fed has lowered interest rates in late 2002 and after 9/11. Before that, it was in 1994 and in the early 1990s. Most of those cuts led to significant market gains, says Mr. Piantedosi.

However, there are also plenty of investment professionals who are skeptical of the market's rise. One of those is J. Michael Barron, CEO of Knott Capital in Exton, Pa. He's concerned about the deterioration of the housing market, the increased cost of servicing debt as more adjustable rate mortgages are reset, and slower job growth in the general economy.

"The market has basically ignored these risks and continued to work higher," he says, adding, "We think it's a time when most investors should be more cautious."

In Greenville, S.C., Hugh Moore, a partner at Guerite Advisors, doesn't see the stock market moving much higher. His measure is corporate profits as a percentage of gross domestic product. He says that historically corporate profits are 4.5 to 6.5 percent of GDP. Today, they are at 9 percent of GDP. "Unless we're in completely uncharted territory, we're at maximum earnings peak right now," he says. "That means there's not a lot of room for the market on the upside."

While the Dow average is hitting a high, the broader stock market as measured by Standard & Poor's 500 index is still 12 percent below its all-time high. The Dow average is up 9 percent for the year but the S&P average is up only 7 percent.

"The S&P and the NASDAQ had higher highs and steeper drops," says Anthony Chan, chief economist at JPMorgan Private Client Services in New York. "So, I don't think the stock market as a whole is exploding here."