Down Memory Lane as Dow Closes Above 13000 - SmartMoney.com

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After flirting with the milestone for days, the Dow managed to close above 13000 today -- a mark not reached since 2008.
It may just be a number -- the market didn't undergo a magical transformation upon hitting 13000 -- but such milestones do have a psychological impact, experts say. And even if pronouncements made following big numbers have a history of being way off base, investors and analysts just can't help speculating. "They're really psychological levels that people can relate to," says Scott Wren, senior equity strategist for Wells Fargo Advisors. "Investors think, 'When was the last time we were here?'"

A Brief History of Market Milestones

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As the Dow pierces 13,000 on Friday, Jonnelle Marte joins Markets Hub with a look back at other milestones. Photo: Associated Press.

As the market nears 13000 this time around, some investors are reflecting on how far they've come since the financial crisis. While many recovered what they lost in 2008, others are still trying to bounce back. The average participant in a 401(k) plan broke even between 2007 and 2010, according to Vanguard. Some investing pros also view the Dow's recent gains as a sign that markets are calming and a sign that gains might continue in the coming months.
But for all the hoopla around market milestones, investing pros say these thresholds don't really move markets too much up or down. Some jittery investors come off the sidelines and back into the market after reaching such levels, while others use the opportunity to sell some shares and take gains. Either way, experts say investors often get carried away with emotion and ignore key factors like stock valuations, monetary policy and economic growth that have a bigger impact on markets. That's why it pays to look back at the last few times stocks hit a big milestones and whether investors' expectations weren't met. "We need to learn from history," says Diane Pearson, an adviser with Legend Financial Advisors in Pittsburgh.
Here is a recap of some of the Dow's biggest milestones, how investors viewed the market at the time, what really happened and what lessons were learned.

Dow 5000

• November 21, 1995

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What the pros predicted: When the Dow crossed the 5000 mark for the first time in November 1995, President Bill Clinton was in his second year of office, the U.S. was coming out of a recession and the world was buzzing about the newly launched World Wide Web. Having crossed 4000 just nine months before, pros expected more rally ahead.
What happened: The threat of another recession interrupted some of that run-up, but the U.S. recovered and technology stocks took off as anticipated, says Wren. By Valentine's Day 1997, the Dow had topped 7000.
Lesson for investors: Watch trading volume. While stocks kept increasing, it was a minority of investors pushing stocks higher, says Pearson. If the broader market isn't behind a move up, it may not be sustainable, says Pearson.

Dow 10000

• March 29, 1999

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What the pros predicted: Investors bedazzled by the Internet began to dump other quality stocks to get a piece of the technology sector, driving the Dow above 10000 for the first time in March 1999. Some pros began to question whether traditional measures like valuations, which showed that stocks were beginning to get expensive, would still matter in a post-web world where stocks were expected to keep soaring. "We had that feeling of unlimited potential," says Wren.
What happened: The tech bubble burst and stocks peaked at 11723 in January 2000. The Dow tumbled in the following years, bottoming out at roughly 7200 in October 2002.
Lessons for investors: Don't ignore valuations. The fact that the rally was led by two sectors -- technology and telecom -- should have been a warning sign that it was not sustainable, says Wren. And many investors need to have a sell strategy for taking profits and cutting losses when stocks are on their way down, says Pearson.

Dow 12000

• Oct 19, 2006

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What the pros predicted: The Dow had risen 12% so far that year, as both regular investors and fund managers loaded up on blue chips. And while some investing pros raised red flags about the slumping housing market (it was also the 19th anniversary of the 1987 stock-market crash), many other analysts and fund managers said the rise would continue so long as inflation and interest rates remained in check.
What happened: Stocks would shoot up another whopping 2000 points over the next nine months, peaking at about 14000.
Lesson for investors: When formerly jittery investors throw caution to the wind and starting snapping up stocks, analysts say the market may be due for a correction -- or a crash. By mid-2008, stocks would be begin their steep descent back down (see next slide) and the U.S. would see its worst downturn since the Great Depression.

Dow 13000

• April 25, 2007

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What the pros predicted: After the Dow doubled in five years to reach 13000 in April 2007, investors were emboldened by a growing global economy, a booming housing market and low interest rates. Optimistic investors briefly pushed the Dow to 14000 just three months later and many expected the run to continue.
What actually happened: The housing market collapsed and the credit crunch took a toll on businesses, causing stocks to take a 50% dive by March 2009. Unemployment soared, forcing many investors to pull out of stocks and lock in their losses.
Lessons for investors: High levels of debt, at both the individual and business level, can weigh down the economy, says Wren. Many investors also ignored signs that pointed to a strained housing market, he adds. Advisers say investors should remember to scrutinize companies' balance sheets to prioritize low debt and strong balance sheets.

Dow 14000

• July 19, 2007

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What the pros predicted: After the Dow topped two major milestones in nine months, some investors viewed 14000 as just another notch in the market's steady climb up. Encouraged by strong corporate profits, many continued to buy stocks.
What actually happened: The Dow's reign above 14000 was fleeting. Early signs of the credit crisis sent stocks tumbling soon after, and the index plunged below 12000 in the months that followed. The Dow hit 13000 again in 2008 before stocks plummeted to a low of 6547 in March 2009.
Lesson for investors: Many of the largest market moves happened on days when trading volume was low, a sign the gains were artificial, pros say. Investors learned the degree to which high oil prices, a weakening mortgage market and economic uncertainty could take their toll on stocks.