Why the Dow's Gains Today Could Lead to a Larger Rally Ahead

It was a ho-hum day in markets today, with the Dow Jones (INDEX: ^DJI  ) seeing 0.07% gains, essentially flat. Most the attention from investors today was slavishly focused on the announcement of Apple's (Nasdaq: AAPL  ) newest iPhone. Considering JPMorgan Chase estimates that the iPhone could add 0.25% to 0.5% to America's GDP in the fourth quarter, that level of attention isn't exactly undeserved.

Yet while markets weren't exactly screaming to new highs today, the seeds were planted for a continuing market rally.

Really, a rally?
Of course, the swords that hang over the world economy right now look far too dangerous for any kind of continuing rally. China's growth is slowing, Europe remains a mess, and the U.S. has hundreds of billions in spending cuts and tax increases slated to take effect early next year as we near the much-dreaded "fiscal cliff."

Yet in spite of all these continuing storylines that have gained prominence across the year, the Dow is up more than 9.1% on the year. The Nasdaq (INDEX: ^IXIC  ) is up a whopping 19.5%, and the S&P 500 (INDEX: ^GSPC  ) has seen its own 14.2% gains. Even in Europe, where the continent has seemed ready to unravel all year, London's FTSE 100 index has managed to eke out a 1.5% gain in 2012.

Markets move against headlines
The disparity between dour headlines and rallying stock markets is confusing. It's largely borne  of corporate earnings that, while slowing down, are expected to continue growing and also of a belief that Europe will eventually find a way out of its current predicament.

On the Europe front, today saw some especially important news: Germany's top court upheld the euro rescue fund, or European Stability Mechanism, which was created to help bail out weaker countries such as Italy and Spain. Germany has become the linchpin keeping the eurozone together and was also on the hook to commit 190 billion euros to the ESM. The country's participation in the ESM was essential for having the program seen as a viable rescue program on the continent.

Slow progress better than no progress
The point being, whether or not this year's continuing rally is sustainable, a key component of the rally has been Europe's progress toward not letting the euro fracture. If German courts had ruled the county was unable to participate in the ESM, Europe would have essentially rolled back the progress it made across the past four months. Such a situation would have left the 2012 rally left cold in its tracks.

So whether markets continue moving up in the coming weeks or not, today's actions provided a key component needed for future market gains: the appearance that Europe continues making steady progress.

Back to the markets
Looking back toward the markets, as I mentioned in the opening, all eyes were on Apple today. The company unveiled its newest iPhone, which features a larger screen, an update to the company's operating system, faster browsing thanks to an LTE chipset, and the usual upgrades such as a faster processor and a better camera. The inclusion of LTE was enough to make Verizon (NYSE: VZ  ) the top gainer on the Dow today. The company has invested heavily in the world's most expansive LTE network, and 50% of the smartphones it sells are iPhones. Translation: Apple's decision to put LTE in the iPhone could finally start moving subscribers to more expensive LTE plans.

The new iPhone 5.

Is the hype around the iPhone warranted? Almost certainly. While individual features on the phone might compare with already available Android phones, the important thing to remember is that Apple's phones are beloved in large part for their larger "ecosystem" of apps and ease of use. With a pent-up demand for a larger iPhone upgrade after the iPhone 4S was largely an update to the iPhone 4, it's a near certainty that the iPhone 5 will be the largest consumer-product launch ever.

Top-notch advice
With Apple's iPhone launch poised to boost the entire American economy in the fourth quarter, there's little doubt Apple has become the defining company of a generation. Yet with its huge size and uncertainty surrounding the iPhone 5 and future product launches like Apple TV, the stakes have never been higher for the company. We've created a brand-new Apple research service, which comes with a bonus iPhone 5 report on how investors can profit on the new device. Sign up today to get it all, and it comes with free updates for a year.

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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