Dow 10,000: How Long Will It Take?

Now that the Dow Jones Industrial Average has broken the psychologically important 9000 level for the first time since January, is Dow 10,000 within sight?

Eventually yes, say our experts, some of whom expect to see Dow 10,000 as early as the end of this year. But whether that benchmark is sustainable is questionable.

Less-bad-than-expected second-quarter earnings announcements have helped propel the Dow higher in recent weeks, but while there may be more potential for gains in the short term any sustainable growth won't occur until larger fundamental issues improve — namely unemployment and consumer spending.

“It’s the battle of the economy versus earnings,” says Doug Roberts, the chief investment strategist for ChannelCapitalResearch.com. He says prospects for hitting 10,000 look pretty good over the next six months or so, as long as earnings continue to come in better than expected. But toward the end of this year or beginning of 2010 may be “where the rubber meets the pavement."

“I’m kind of short-term bullish but longer-term bearish,” says Roberts.

While the second-quarter earnings season has offered enough upside surprises to make it look like the weather is starting to improve, this could just be the eye of the storm, not the end of it, says Howard Silverblatt, a senior index analyst at Standard & Poor’s.

“We’re getting ahead of ourselves, in terms of earnings, significantly,” Silverblatt says. “The way companies are making money this quarter is cuts,” he says. But cuts can only take companies so far before sales will have to increase in order to continue the parade of good news. That means consumers need to start spending.

Investors should get a better sense of how willing consumers are to re-open their wallets over the course of the next three weeks, when retailers report same-store sales numbers and earnings. While Silverblatt expects some retailers to offer reasonably positive outlooks, other experts question the ability of overleveraged households to drive any real economic growth — especially as unemployment continues to climb. (The Department of Labor said unemployment hit 9.5% for the month of June.)

Americans won’t start spending unless their incomes start rising, says Keith Hembre, chief economist for First American Funds. “Given the shock that’s occurred to the household balance sheet, there’s probably likely to continue to be upward pressure on savings rates,” says Hembre, who expects to see constrained economic growth over the next several years. One possible upside surprise: increased demand from consumers in emerging market economies, he says.

Most experts SmartMoney spoke with agreed that the current rally will eventually give way to a pullback – the tricky question is: How quickly will we see the other side of what some expect to be a U-shaped recovery?

With the relatively good news of earnings season behind us and economic indicators still mixed, a retreat in the Dow could come quickly, says Roy Williams, CEO of Prestige Wealth Management Group, a wealth-management firm based in Pennington, N.J. “This is a healing process that we’re going through,” Williams says. “I think by year’s end we have opportunity to see Dow 10,000.”

Kevin Mahn, managing director and chief investment officer of Hennion & Walsh, says he is “cautiously optimistic” for a more sustainable recovery for the end of this year or beginning of 2010. “Investors who are looking to take part in this recovery shouldn’t just be looking at the Dow and the S&P,” he adds. In fact, he expects innovative small-cap firms leading the long-term recovery.

Although, any predictions are difficult to make these days. “This is absolutely an unprecedented environment, and the scope for surprises is unusually large,” says Hembre.