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Originally published Sunday, October 8, 2006 at 12:00 AM

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Why so little celebrating after the Dow's record-setting run?

Except for the media noise, there wasn't much euphoria on Wall Street this past week as the Dow Jones industrial average hit an all-time...

The Associated Press

NEW YORK — Except for the media noise, there wasn't much euphoria on Wall Street this past week as the Dow Jones industrial average hit an all-time high. With most investors' portfolios trailing the Dow's performance, the crowds weren't cheering too loudly for its record run.

Gone were the champagne toasts that ushered in the Dow's last record run in 2000. This time, the party was limited to the lucky few who own a handful of blue-chip stocks. What the world's best-known stock index has been up to lately doesn't reflect the beat of today's market much at all.

The Dow — a weighted average of 30 large-cap stocks — in recent weeks had been closing in on its last record of 11,722.98, which was reached on Jan. 14, 2000, at the height of the stock market boom. It finally topped that on Tuesday and then extended its gains on Wednesday and Thursday before retreating slightly on Friday to close at 11,850.21.

Its comeback has been a long, bumpy and often grueling ride. It took six years and eight months to work off an ugly hangover from the dot-com bust and post-Sept. 11 blues and reach a new high. Typical rebounds after a bear market take four years and four months, according to Merrill Lynch.

The Dow tumbled 37 percent in a nasty two-year decline after the air came out of the Internet balloon, a recession began and corporate scandals mounted. Even after hitting a bottom in October 2002, the climb higher has been slow.

Things started looking up this summer, fueled by a decline in energy prices and by mounting signs that the Federal Reserve will not raise interest rates again this year. Sparking the Dow's record was the recent tumble in oil prices to seven-month lows.

Not only did that help push the Dow to a new high, but it also added to its strong 2006 run. The Dow is up about 10 percent for the year.

But the celebration isn't being felt all around. Some of that is because other broad-market indicators are far from their record highs. The Standard & Poor's 500 index is still about 12 percent away from its record high set in March 2000, while the Nasdaq composite index is still down about 55 percent from its peak that month.

Skeptics also say the Dow's record glosses over reality. Of the 30 stocks in the Dow, only 10 — including Boeing, Altria Group and Caterpillar — are trading above their January 2000 level. That means two-thirds of the Dow's stocks — including Microsoft, General Motors and Intel — are trading well below what they were six years ago.

The Dow's new closing high is also 15 percent below its 2000 record in real-terms when adjusted for inflation. The benchmark index is also trading well below its previous highs when adjusted for the decline in the dollar, which has fallen more than 25 percent since 2002 against other major currencies.

All that might explain why investors haven't been so giddy over the Dow's recent gains. They are more pessimistic about the market's current prospects.

A new poll by Birinyi Associates of 50 Web investment blogs found 45 percent are bearish, 40 percent are bullish and 15 percent are neutral.

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Highlighting that sentiment, many mutual-fund investors have been redeploying money from domestic stock funds to international funds. According to Citigroup, a staggering 86.8 percent of the $118.56 billion in total U.S. equity flows has headed overseas so far in 2006.

And those who are investing in U.S. issues for the most part aren't seeing much of a spillover from the Dow's record run. There were 147 issues on the New York Stock Exchange making 52-week highs out of 3,448 traded on Tuesday, indicating a very narrow participation in the blue-chip rally, according to Merrill Lynch.

Now that the Dow has set a record, will the broader market follow? Wachovia Securities chief investment strategist Rod Smyth deems that can happen only if investors believe in a new era of faster earnings growth or are willing to pay a higher price for the same earnings stream.

They did both during the late 1990s stock-market boom. But they also still have the scars to show for that bout of irrational exuberance.

There also are plenty of clouds building on the economic horizon.

China has emerged as a major competitor, and the U.S. trade deficit is at record levels

The budget deficit is looming as a major problem as baby boomers begin to retire. Health-care costs have soared.

The savings rate is negative as people go deeper in debt or use home-equity loans to pay for purchases.

Energy costs have surged, although plunging oil prices in recent weeks have given the economy strength and helped boost stock prices.

At the same time, the housing market developed a bubble of its own in the past six years as the Fed kept interest rates low to prop up the economy.

Now, housing construction has plunged, and prices generally have softened around the nation. Some fear that the end of this bubble could sink the economy. Others disagree. Whatever the case, the economy is slowing down.

Yet Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, said that despite the country's problems, the U.S. economy has remained very adaptive.

One example is the growth since 2000 of hedge funds and private equity. Hedge funds are pools of capital in which wealthy individuals invest large sums. They can engage in aggressive buying and selling strategies without being subjected to the regulations that govern mutual funds. Tannenbaum said more regulation is needed because of the fear that a hedge-fund meltdown could possibly do severe damage to the U.S. economy.

But right now, "These new sources of capital have become significant players in a lot of markets."

Information from the Chicago Tribune was included in this report.

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