Market milestone: Stocks return to late 2007 level

Posted Sept. 06, 2012, at 8:43 p.m.

NEW YORK — The last time the stock market was this high, the Great Recession had just started, and stocks were pointed toward a headlong descent.

But on Thursday, the Dow Jones industrial average hit its highest mark since December 2007, and the Standard & Poor’s 500 index soared to its highest level since January 2008 in a rally that seemed destined to mark a milestone: American stocks have come almost all the way back.

A long-anticipated plan to support struggling countries in the European Union provided the necessary jolt, and the gains were extraordinarily broad. All but 13 stocks in the S&P index were up. European markets surged, too.

“There’s just a sea of green,” said JJ Kinahan, TD Ameritrade’s chief derivatives strategist. “It’s pretty fun.”

At the start of 2008, the U.S. economy was already a month into recession, though most people scarcely knew it at the time. The S&P had recently hit an all-time high, and the unemployment rate was 5 percent, compared with the current 8.3 percent.

Then, in March 2008, the investment bank Bear Stearns collapsed under the weight of bad mortgage bets, and investors began to sell. In September, the full financial crisis took hold as Lehman Brothers filed for bankruptcy, banks stopped lending to each other and investors began dumping stocks in earnest.

By March 2009, the S&P had dropped 57 percent from its high to hit a 12-year low of 676.

Since then, the index has been on an impressive if often bumpy climb. Helping to power it was unprecedented support from the Federal Reserve, which critics say has reignited a dangerous gambling spirit among professional investors, and record profits at big U.S. companies.

Although stocks have rebounded, the broader economy is still lagging. But Barry Knapp, head of U.S. equity strategy at Barclays Capital, said stocks tend to anticipate the future economy rather than reflecting current conditions. So the signs are good.

“It can be a misleading forecasting tool, but sometimes it’s telling you something significant,” he said. “It’s entirely possible the stock market is telling us that there is a better economic environment out there.”

The question now is whether big companies can continue to post record profits. The immediate outlook has no shortage of potential obstacles.

The U.S. economy grew a tepid 1.7 percent in the April-June period, less than half the pace of late last year. Big overseas economies, like Brazil’s and China’s, are slowing. And many countries in the 17-nation eurozone are in recession.

On Thursday, the chief economist of the Organization of Economic Cooperation and Development said he expects even powerhouse Germany to fall into recession by the end of the year.

Thursday’s rally got momentum after the president of the European Central Bank unveiled a new program to buy government bonds from the region’s struggling countries with the aim of lowering their borrowing costs. Mario Draghi said the program will have no set limit on how much it can buy.

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