The US economy remains weak, with unemployment stubbornly high – but Wall Street put those concerns aside yesterday, as traders betting on continued central bank support propelled the stock market to an all-time high.
The momentum had been building up for weeks. Save occasional breaks, the Dow Jones Industrial Average has been on a steady upward trend since November last year.
Earlier this month, it broke though the 14,000 point mark not seen since before the financial crisis. Yesterday, the index climbed as high as 14,286 in early trading, breaking the intra-day record set on 11 October 2007, when it touched 14,198.1.
In the afternoon, the benchmark US index, which tracks the values of 30 large companies, also surpassed its record for a closing high, ending the session at 14,253.77, well above the previous all time high of 14,164.5, which was set on 9 October 2007.
Yesterday's rally lifted markets around the world, with the FTSE 100 in London ending at a new five-year high, up 1.4 per cent at 6,431.95, and the blue-chip Euro Stoxx 50 more than 2 per cent higher at 2,683.02. However, the European benchmark is still 50 per cent below its June 2007 heights, while, 13 years on, the FTSE 100 is still 7 per cent beneath the 6,950.6 high it hit on 30 December 1999.
But even as the bulls drove the US market higher, the sense of caution was palpable.
"The question is, can the Dow maintain these levels?" Matthew Lifson, a currency trader in New York, asked Reuters. "There is nothing coming out today that will alter the view of the US economy."
The US Federal Reserve has been feeding the bulls with unprecedented stimulus measures, buying some $85bn (£56bn) worth of bonds each month, besides maintaining record-low interest rates as it attempts to foster a recovery.
Concerns that the measure might be rolled back earlier than expected were put to rest last week, when the Fed chairman, Ben Bernanke, told Congress that the risks – including the risk of over-exuberance on the markets – of keeping the measures in place were outweighed by the potential reward of a wider economic recovery.
"To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," Mr Bernanke told the Senate Banking Committee.
"There is no risk-free approach to this situation … The risk of not doing anything is severe as well. So, we are trying to balance these things as best we can," he said.
On interest rates, the Fed announced last year that it would keep them at record lows until unemployment in the world's largest economy drops below 6.5 per cent. Currently 7.9 per cent, policymakers do not expect it to fall back to that level until 2015.
The new record brings the American stock market full circle from the financial crisis. The previous record was just before the credit crunch led to the collapse of the Lehman Brothers investment bank in mid-September 2008, triggering a global financial panic and driving the US – and world – economy deeper into what many have labelled the great recession.
Although much improved, the wider economic picture remains far from inspiring. The US economy suffered an unexpected slowdown at the end of last year, while economists have warned that $85bn of spending cuts that came into effect earlier this month could shave half a per cent off the 2 per cent growth estimate for 2013.
But with extraordinary stimulus measures firmly in place, Wall Street traders remain optimistic for now, with yesterday morning's gains translating to more than double the 6,547 seen in March 2009 – the market's lowest level during the crisis.