Blue-Chip Dow at 3-Year High

U.S. blue-chip index, Dow Jones Industrial Average (DJIA), broke through to its highest close since May 2008, back before the Lehman Brothers Holdings Inc. collapse, as investors increasingly put aside fears of economic calamity and focused again on fundamentals.

Reports of a three-year low in unemployment and other positive developments Friday pushed the Dow ahead 156.82 points, or 1.23%, to 12862.23. The DJIA index still have to rise 10% to reach its record close of 14164.53, hit Oct. 9, 2007.

The blue-chip index’ surge is a sign of the extent to which investors have put aside the global fears that gripped them last summer. Then, the Dow fell almost 20%, which would have marked a new bear market.

Since Lehman collapsed in September 2008, stocks have often been driven by raw fear of financial meltdown rather than by economic fundamentals. Stocks plunged when fears were strong. They recovered only when fears quieted enough for investors to focus on the fact that super low interest rates and government stimulus were helping economic growth.

Market fears erupted again in 2011 when investors saw the risk of a European debt meltdown, a "double dip" by the U.S. into another recession or a sharp slowdown in China. But just when a bear market seemed inevitable, the European Central Bank began loosening monetary policy. It eventually launched a new three-year lending program to support European banks. The Federal Reserve committed itself to keeping interest rates low and hinted that it would resume spending tens of billions of dollars buying bonds if needed.

A quiet U.S. economic recovery, with slow growth and low inflation, is a fertile background for stock gains. Unemployment remains high, but as long as it doesn't hold back profits, it helps keep down inflation, which in turn keeps interest rates low and provides support to stocks.

But fears of a euro-zone meltdown or a problem in China remain could surge back at any time. The anxieties continue to keep many individuals away from stocks, leaving the market firmly in the hands of professionals.

The broader Standard & Poor's 500-stock index, which rose 1.46% Friday to 1344.90, is up 6.9% so far this year, its best start to a year since 1987. It still hasn't returned to its own post-Lehman high, however.

Stocks in the S&P 500 are trading at around 13 times forecast 2012 corporate-profit levels, well below the price-earnings multiples of 16 and more that are common when markets are rising. It would be normal for stocks to pull back now, as investors view the breakthroughs for the Dow and Nasdaq as a good time to cash in some profits.

But analysts say they aren't yet seeing the kind of excessive investor optimism that can be a sign of more serious stock pullbacks to come. On Friday, economists were warning that 2012 could be a bumpy year for economic growth and the stock market.