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The stock market's gains haven't been matched elsewhere. Real estate prices in some cities are still near the lows they hit at the worst of the financial crisis. Economists expect that this year could bring record foreclosures. Some state and local governments are struggling to provide basic services, and the federal deficit is at its highest level as a percentage of GDP since the end of World War II. And the unrest in Egypt shows that the market is still vulnerable to unforeseen events. The Dow fell 1.4 percent Friday, its largest drop in more than two months, because of concerns that the protests in Egypt could disrupt the global oil business. Egypt controls the Suez Canal, a vital route for oil tankers and cargo ships. But the economy is in better shape now than it was the last time the Dow closed above 12,000, on June 19, 2008. That turned out to be just a third of the way through the Great Recession. The Dow had tumbled about 2,000 points from its all-time high of 14,164 in October 2007 but had much further to fall. Unemployment stood at 5.6 percent and was on its way to 10.1 percent. Now the economy is expanding again. But jobs remain scarce, and the unemployment rate is 9.4 percent. Millions are unable to afford to invest in a stock rally passing them by. The lack of demand from small investors is making stocks cheap by historical standards. The Dow now trades at 14.7 times the combined earnings per share for the past year of the 30 stocks that make up the Dow, well below the historical average of 17. If the Dow traded at 17 times earnings now, it would be at 13,877
-- only 287 points below its record high. The Dow is 15 percent below its record from October 2007 and could reach a new high this year. Pulling that off would require a total gain for 2011 of about 22 percent. The Dow has risen that much or more in a year eight times since 1985, or roughly once every three years. Small investors are starting to buy stocks again. Investors moved $2.5 billion into mutual funds that held American companies over the first three weeks in January, the largest increase since April of last year. Large brokerage houses that manage investments are starting to see the return of individual investors. "Our clients are showing increased confidence in the economic recovery," says Morgan Stanley's chief financial officer, Ruth Porat. If unemployment starts dropping steadily, the bull market probably has further to go. Before the 2008 financial crisis, the last time unemployment was at 9.4 percent was July 1983. By November 1985, it was at 7 percent, and the Dow stood 23 percent higher.
[Associated
Press;
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