Getting better all the time

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FILE - In this Jan. 10, 2012 file photo, trader Kevin Lodewick, right, works on the floor of the New York Stock Exchange. A strong one-day rally _ caused by a deal to lock down badly needed bailout money for Greece, perhaps, or another unexpectedly positive economic report, like Friday's unemployment numbers _ could put it over the 13000 mark. (AP Photo/Richard Drew, File)

Updated: March 9, 2012 8:14AM

NEW YORK — It was just last summer when the Dow Jones industrial average shed 2,000 points in three terrifying weeks. Investors had a host of things to worry about, including the possibility of another recession.

Now the Dow is within reach of the rarefied 13,000 mark — a level it hasn’t seen since May 2008, four months before the financial system almost came apart.

The stomach-turning summer is a bad memory. Europe appears to be getting its act together, last summer’s downgrade of the U.S.’s credit rating was quickly forgotten, Washington is mostly behaving, and recession fears are gone.

“There are signs that the economy is getting back on its feet and the market is reacting to that,” said John Prestbo, executive director of Dow Jones Indexes. “The mood is just better in this country than it has been for a while.”

The Dow rose 33.07 points Tuesday to close at 12,878.20.

The Dow is roughly a 10 percent rally away from its all-time high — 14,164.53, reached Oct. 9, 2007, when the investment houses Bear Stearns and Lehman Brothers still existed and the unemployment rate was 4.7 percent.

A 10 percent surge may seem like a lot, but it’s really not. The Dow has gained almost 15 percent since Nov. 25, just 10 weeks ago.

Though there’s a long way to go to get the country back to economic health, there are pockets of encouragement. Unemployment is still 8.3 percent, but it’s the lowest since February 2009. Economic output grew every quarter last year.

There’s evidence that the rally has room to run. In a popular measure of how expensive stocks are, the 30 companies that make up the Dow are trading at an average of about 13 times their annual earnings per share.

The last time the Dow was at 13,000, in May 2008, stocks were trading for about 15 times earnings. Stock-market research firm Birinyi Associates estimates Dow stocks have traded at an average of 16 times earnings over the past two decades.

The fire-sale discounts have already come and gone, though. Those were back in early 2009, when the Dow bottomed at 6,547.05, its Great Recession low — a little more than half the level now. Back then, Dow stocks traded at nine times earnings.

Not everyone believes the rally will last. Joe Gordon, managing partner at Gordon Asset Management in North Carolina, is dubious. He cites the unresolved European debt crisis, the U.S.’s historically high national debt and the millions of people who have given up looking for work, part of the so-called underemployed.

“This is like drinking a lot of coffee in the afternoon,” Gordon said. “It perks you up, then once it fades 45 minutes later you’re even more tired.”

Another wrinkle is that the Dow tracks just 30 companies, so it doesn’t take the full pulse of the market. The Standard & Poor’s 500, with its much larger roster, is still 16 percent away from its all-time high.

But despite its size, the Dow is the market gauge that penetrates the public consciousness, generating headlines and water cooler buzz more than the less-publicized S&P.

That’s important because the stock market, even if it has no direct bearing on the fundamentals of the economy, is a psychological motivator of spending because of something known as the wealth effect.

Even people with no stock investments will let their decisions be influenced by swings in the Dow. When it’s up, we tend to feel richer and spend more. When it’s down, we tend to feel poorer and spend less.

There’s good reason the Dow has pull over the financial mood of the country. Its 30 stocks account for 25 to 30 percent of the market value of all U.S. public companies, and about 40 percent of the dividends, Dow Jones Indexes estimates.

“Nothing of substance can happen in this economy without these companies feeling it,” Prestbo said.