Investors Favored Bond Funds as Dow Average Rallied Past 10,000

By Jeff Kearns and Mary Childs

Oct. 15 (Bloomberg) -- As the Dow Jones Industrial Average posted its steepest advance in seven decades to rally above 10,000, investors were pouring money into bonds.

The nation’s fixed-income funds have attracted 18 times more money than stocks in 2009, even as the Dow surged 53 percent after sinking to a 12-year low in March, according to data compiled by Morningstar Inc. and Bloomberg. Americans who stashed $1.45 trillion in money-market accounts in 2007 and 2008 as the financial crisis intensified have redeployed a quarter of that cash.

That’s a bullish sign to some money managers after the Dow climbed 3,468.81 points over the last seven months on speculation $11.6 trillion in government stimulus will end the recession. Intel Corp.’s sales forecast and earnings from JPMorgan Chase & Co. pushed the measure up as much as 1.6 percent to 10,027.73 yesterday.

“A lot of people make fun of these milestones, but I think that it has an effect on psychology,” said David Darst, the New-York based chief investment strategist at Morgan Stanley Smith Barney, which has $1.4 trillion in client assets. “That can have an effect on tipping people over to being more worried about being out of the market.”

A net $254.6 billion was added to bond funds during the first nine months of 2009, compared with $14.5 billion for stock managers, according to Chicago-based Morningstar. Almost $3.45 trillion remains in U.S. money-market accounts, data from Washington-based Investment Company Institute show.

Steepest Since 1987

The Dow, which first reached 10,000 more than a decade ago, is 29 percent below its Oct. 9, 2007, all-time high even after the biggest two-quarter advance since 1987. The measure trades for 14.5 times the operating earnings of its companies from the past year, 33 percent more expensive than the 12-year low of 11 reached in June.

Bank of America Corp., American Express Co. and JPMorgan Chase & Co. more than doubled since the 30-stock gauge reached its low in March as global financial firms began recovering from $1.6 trillion in writedowns and credit losses. International Business Machines Corp. and Hewlett-Packard Co. jumped at least 53 percent on signs the nation was recovering from the worst recession in seven decades.

The Dow fell as much as 43 percent after Lehman Brothers Holdings Inc. filed the largest bankruptcy in September 2008 and dragged the financial system to the brink of collapse. Investors have returned to the stock market after the U.S. government lent, spent or guaranteed $11.6 trillion to shore up banks and revive the economy.

‘Mom and Pop’

“It’s still going to be a volatile market but we think it’s sustainable and that we’re on track to go up from here,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Management in Cincinnati. “It’s an important psychological level that’s more an indication of the mom and pop money coming back into the market.”

All 30 Dow companies have risen since the March low, led by Bank of America’s fivefold surge after the biggest U.S. bank by assets reported a first-half profit of $7.47 billion. American Express more than tripled for the second-best performance, followed by a near-tripling for JPMorgan.

The 113-year-old benchmark closed above 10,000 for the first time on March 29, 1999, and went on to advance 25 percent that year for a ninth-straight annual gain. The gauge peaked at 11,722.98 in January 2000 before plunging 38 percent through October 2002 as the technology-stock bubble burst.

‘Arbitrary Number’

The Dow exceeded 10,000 again in December 2003, fell below five months later and then remained above every day from October 2004 to October 2008. It set a record high of 14,164.53 in October 2007 after surging 94 percent in five years. Nine months later, the gauge entered a bear market, marked by a decline of at least 20 percent, for the first time since 2002.

While the 10,000 level may provide a temporary boost to investor confidence, it won’t spur lasting gains by itself, said Jerome Dodson, who oversees $2.9 billion at Parnassus Investments in San Francisco.

“It’s an arbitrary number,” he said. “Investor psychology is important in the short term, but the economy and corporate profits are the things that shape the level of the market in the long term.”

After falling as much as 25 percent to begin the year, the Dow erased its drop on June 12 as confidence grew that the worst recession since World War II is ending. The Economic Cycle Research Institute’s gauge of U.S. growth surged 26 percent in the week that ended on Oct. 2, the fastest increase in data stretching back to 1968. More than 72 percent of Standard & Poor’s 500 Index companies beat analysts’ second-quarter earnings estimates, matching the greatest proportion since 1993.

“Ten years ago, the first time I was handed a Dow 10,000 hat, I never suspected it would be a fashion staple,” said Diane Garnick, who helps manage $413.9 billion as an investment strategist at Invesco Ltd. in New York. “And I don’t think this will be the last time we hit 10,000, because of the volatility in the market.”

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Mary Childs in New York at mchilds4@bloomberg.net.

Last Updated: October 15, 2009 00:01 EDT