The U.S. stock market yesterday brushed off a major plunge in Chinese stocks and surged to new milestones, with both the Standard & Poor’s 500 and the Dow Jones stock indexes hitting their highest closes since the 2000 stock crash.
The blue-chip S&P 500, considered the best barometer of stocks and the most closely tracked index on Wall Street, jumped 12 points to 1,530, surpassing its record close of 1,527 on March 24, 2000, at the peak of the dot-com bubble.
The Dow Jones Industrial Average, which in October was the first major index to recover from the stock market’s seven-year slump and cross the threshold into record territory, yesterday climbed another 111 points to a record of 13,633.
Among the major stock indexes, the only one that has not completed the journey is the technology-driven Nasdaq Composite Index, which remains at about half of its March 2000 high of 5,049.
Wall Street’s achievement was all the more remarkable because it came on a day when the Chinese stock market dived 6.8 percent after the Beijing government announced tax measures to cool its sizzling market. A similar crash in Chinese stocks in late February had reverberated across the globe and triggered a major plunge in U.S. stocks.
Since then, a big wave of mergers and acquisitions has boosted stock shares to new highs. Stocks yesterday were helped along by a reassuring economic report from the Federal Reserve and resumed their upward climb after pausing briefly to absorb the news from China.
“When will the party end? No one knows,” said Joseph P. Quinlan, chief market strategist with Bank of America, who noted that the merger boom is fueling bullish sentiment and stock rallies worldwide.
He calculates that global merger activity already has surpassed $2 trillion and is on pace to far exceed last year’s record. The acquisitions are nurtured by strong profits and revenues, low interest rates and the easy availability of credit in the United States and elsewhere around the world.
The takeover boom that is feeding the run-up in stocks could continue for quite a while, he said, as it differs in important ways from previous takeover frenzies in the 1980s and 1990s. Today’s craze is being driven by private equity firms, which buy public companies using massive amounts of debt and take them private for restructuring and resale. These equity firms have gigantic cash war chests and have accounted for an unprecedented $400 billion in acquisitions so far this year and $712 billion last year.
Also, cash-rich developing countries like China, Russia and Middle Eastern oil exporters are participating in the acquisitions bonanza, having shelled out $548 billion for the purchase of U.S. and other multinational firms last year. China has announced it intends to increase equity purchases with funds that the government previously diverted into foreign exchange reserves weighted with conservative bond investments.
Big U.S. multinational companies — which make up both the S&P 500 and the Dow — are especially benefiting from the strong growth that is fueling the acquisition binge in large developing countries. In general, they are best positioned to take advantage of expanding markets overseas, and they profit from a weak dollar that magnifies their overseas earnings when they are brought home and translated into dollars on Wall Street.
“Liquidity and takeover activity should continue to be a good source of support for the stock market,” with “large stocks leading the charge,” said Alexander P. Paris, analyst at Barrington Research. He noted that large companies not only earn more overseas but also are the targets of “private equity firms that have too much money to put to work quickly to bother with smaller companies at this point.”
The market could come in for a rude awakening as early as today, however, when a report on economic output is expected to show growth nearly stalled at less than 1 percent during the first quarter, he said.
While growth was “shockingly low” earlier this year, more recently “the deal-making frenzy has taken attention away from the higher oil prices and all-time record high gasoline prices, which are negatively impacting consumer spending in a significant way,” he said. And “the housing correction still shows no signs of a bottom and is experiencing the worst spring season in many years.”
Another reason to be skeptical of the market, said Mr. Paris, is the likelihood that the takeover frenzy is being fueled by a credit bubble like the one that fed the housing boom between 2000 and 2005.
Still, he said it’s not unusual for stock investors to “look over the economic valley” to what they think will be an economic recovery later this year.
Chris Johnson, senior market analyst at Investor’s Daily Edge, said investors are “pinning their hopes on the Fed lowering interest rates” to revive economic growth later this year, but they may be wrong.
Technical indicators suggest the market is overbought and bullish sentiment at high levels that often presage a weakening in the market, he said.
“Not everyone is looking at stocks as optimistically as the ‘crowd,’ ” he said. An uptick in short-selling positions suggests “the ‘smart money’ may be preparing for a pullback.”
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