NEW YORK — It was just last summer the Dow Jones industrial average shed 2,000 points in three weeks. Investors had plenty to worry about, including the possibility of another recession.
Now the Dow is within reach of the rarefied 13,000 mark — a level it hasn’t seen since May, 2008, four months before the financial system almost came apart.
A strong one-day rally — caused by a deal on bailout money for Greece, perhaps, or an unexpectedly positive economic report — could put it over the top.
What’s more, the average is just a 10 percent rally from an all-time high. And 10 percent rallies can happen fast these days.
The stomach-turning summer is a bad memory. Europe appears to be getting its act together, last summer’s downgrade of the U.S.’ credit rating was quickly forgotten, Washington is mostly behaving, and recession fears are gone.
“There are signs that the economy is getting back on its feet and the market is reacting to that,” says John Prestbo, executive director of Dow Jones Indexes.
The Dow closed Tuesday at 12,878, a 21 percent rally from Oct. 3, its low point for last year. In January, the average rose more or less in a straight line and added 3.4 percent, its best start to a year since 1997.
From here, the record is tantalizingly close — 14,164.53, reached Oct. 9, 2007, when the investment houses Bear Stearns and Lehman Brothers existed and unemployment was 4.7 percent.
A 10 percent surge may seem like a lot, but it’s really not. The Dow has gained almost 15 percent since Nov. 25, just 10 weeks ago.
There’s a long way to go to get the country back to economic health, but there is encouragement. Unemployment is still 8.3 percent, but it’s the lowest since February, 2009. Economic output grew every quarter last year.
Corporate earnings growth has slowed, but analysts think it will pick up again later this year. Investors, always wary of uncertainty, may even be encouraged by some clarity in the Republican presidential nominating race.
Investors are no longer just trying to stem their losses, said Mark Lehmann, president of JMP Securities in San Francisco: “They’re playing a little offense. Six months ago, they were playing defense.”
There’s evidence that the rally has room to run. In a popular measure of how expensive stocks are, the 30 companies that make up the Dow are trading at an average of about 13 times their annual earnings per share.
The last time the Dow was at 13,000, in May, 2008, stocks were trading for about 15 times earnings. Stock-market research firm Birinyi Associates estimates Dow stocks have traded at an average of 16 times earnings over the past two decades.
The fire-sale discounts have already come and gone, though. Those were back in early 2009, when the Dow bottomed at 6,547.05, its Great Recession low — a little more than half the level now. Back then, Dow stocks traded at nine times earnings.
Not everyone believes the rally will last. Joe Gordon, managing partner at Gordon Asset Management in North Carolina, is dubious. He cites the unresolved European debt crisis, the historically high national debt, and the millions of people who have given up looking for work or are underemployed.
Another wrinkle is that the Dow tracks just 30 firms, so it doesn’t take the full pulse of the market. The Standard & Poor’s 500, with its much larger roster, is still 16 percent away from its all-time high.
“It’s 30 stocks,” says Rob Leiphart, an analyst at Birinyi. “It doesn’t give you a representation of anything.”
But despite its size, the Dow is the market gauge that penetrates the public consciousness, generating buzz more than the less publicized S&P.
There’s good reason: The Dow’s 30 stocks account for 25 to 30 percent of the market value of all U.S. public firms, and about 40 percent of the dividends, Dow Jones Indexes estimates.