Dow at an all-time high, who cares?
The Dow is at an all-time high. Here’s the past 12 months:
Once upon a time it might have meant something good, in a kind of “rising tide lifts all boats” sort of way. Nowadays not so much.
Of course, if you have a 401K you’ll probably be a bit happier than you were 4 years ago. Or if you’re an investor with money in the game.
On the other hand, not many people have 401K plans, and not many who do don’t have a lot of money in them, partly because one in four people have needed to dip into their savings lately in spite of the huge fees they were slapped with for doing so. Go watch the recent Frontline episode about 401Ks to learn more about this scammy industry.
Let’s face it, the Dow is so high not because the economy is great, or even because it is projected to be great soon. It’s mostly inflated out of a combination of easy Fed money for banks, which translates to easy money for people who are already rich, and the fact that world-wide investors are afraid of Europe and are parking their money in the U.S. until the Euro problem gets solved.
In other words, that money is going to go away if people decide Europe looks stable, or if the Fed decides to raise interest rates. The latter might happen when the economy (or rather, if the economy) looks better, so putting that together we’re talking about a possible negative stock market response to a positive economic outlook.
The stock market has officially become decoupled from our nation’s future.
mathbabe 
The DOW is probably the worst indicator of the health of this country. But the talking heads on the business channels love to focus only on the markets. And the propaganda works people who don’t understand the way the economy works will say “but the market is up what do you mean the economy is in trouble?”
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ive been trading all my life.. you are right on the money on this.. its a farce.. keep up the great work…thx
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C’mon. You worked at DESCO. You know that the stock market reflects “expectations” and can be highly volatile. Personally, I agree that the market is overvalued and the expectations are unrealistic given the economy and given the failed White House leadership which is bogged down having been caught with their figurative pants down in Nixonian fashion.
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I am no economist, but it seems the stock market is nothing more than a very large casino.
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OK. And who is the “house” in that casino?
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the question is, expectation of what?
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Crowdsourced expectation of the performance of the market. The market is the aggregate of the 30 companies in the Dow-Jones Industrial Index, which is supposed to be a proxy for all US businesses. By manipulating the composition of the Index, high correlation with the market as a whole is usually achieved. By manipulation, I mean deleting companies from and adding companies to the index.
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Whatever, that’s not what I mean. I’m not asking for a definition. I’m referring to the fact that there are lots of different kinds of expectations embedded in the market.
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For example–the market expectation might be “I expect that on average I can get out of this position with a greater return than if I’d invested in risk free rates, which is a pretty easy bet when risk free rates are basically zero as far as the eye can see.” That expectation indicates one more buy against one less sell and the only thing, IMHO, price tells you is where buy crosses sell at a given point in time.
FoW
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Brokers and brokerages, mutual fund managers, ETF companies, insurance companies, banks, bankers, pretty much the entire financial sector. They will get theirs, no matter what. Hedge funds too.
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You are awesome, MB, but on this one you’re flat-out wrong, fashionable as your point may be. BTW I’m a fee-only fiduciary in investment advice and our firm was immediate to post and promote the said great Frontline piece (on IFA.com). I also contacted the said “economist” therein to co-author a book I’ve been piecing together for years called Retirement Plan Shadows: How to Win Your Battle Against the Money Management Machine; not heard back from him but this is not the point on which you are wrong. The market is simply a reflection of human ingenuity, and chance to participate in the greatness that is the very backbone of our country. If you choose not to participate, more power to you. But creating hapless straw man arguments to support your projections is unbecoming of thee. And your inaccurate take on this being an easy money-induced market (and please know it’s my intent to abolish the Fed; I’m no apologist for it) is likewise baseless. See this for evidence as to exactly why: http://www.businessinsider.com/chart-of-the-day-sp-500-vs-oil-2013-5?utm_medium=email&utm_campaign=Moneygame_COTD_051513&utm_source=Triggermail&nr_email_referer=1&utm_term=Money%20Game%20Chart%20Of%20The%20Day …and no, the irony that Business Insider was started by none other than the disingenuous Wall Street character Henry Blodget is not lost.)
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Let’s agree to disagree. I’m not saying it’s not going up more, btw. I’m just saying it’s irrelevant to most people.
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Whether it’s irrelevant to most people is a different question to whether it is overvalued. The market according to standard earnings metrics is not overvalued. There are stocks here and there which are overvalued, but this has always been the cases. The reason why it’s irrelevant to most people is that productivity gains have accrued to the owners of capital and not to labor. The weak employment market has ensured that labor has little to no bargaining power.
If anything, productivity gains have only made labor less powerful, since the productivity gains have led to less demand for labor. Business schools have been pounding into managers’ heads for decades the lesson that labor does not deserve anything more than their bargaining power can demand, and so the disconnect between productivity gains and wages is now viewed as acceptable practice.
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re: businessinsider graph
Can we see the chart of S&P versus gold?
(This is not a rhetorical question: I honestly don’t know.)
Rant: It’s sickening reading these “portals.” Everyone has a hidden agenda blathering half-truths. And on the whole, it’s a zero-sum race laying and clearing these epistemological landmines.
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Cathy, I agree with you and think the bubble is going to burst. OTOH, look what’s happening in the Real Estate market. Is that another bubble forming?
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The disconnect it deeper.
Granting that the Dow is bad measure of anything, broader measures such as corporate profits agree that corporations have fully recovered from the crisis. The problem is that the economy as a whole has not.
The disconnect is between corporations and people.
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Corporations are almost universally leveraged (ex-Apple/Google/MSFT). Thus, increasing their profits is as easy as lowering their borrowing costs. Interesting to see what percentage of “recovery” of corporate profits over the last 5 years has been a reflection of the rate of their cost of carry…
FoW
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Well, that’s part of the story. QE money inflates the stock market, for sure. The other side of this policy is that it’s killing pension funds and old people trying to live off their savings, because the return to saving is negative. It’s called “financial repression.” Your left-leaning readers should like QE, though, because it reduces the rates on mortgages and student loans.
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Great post and thanks for addressing reality as it exists today, far too few do that:) Many seem to keep forgetting that it matters what a company does beyond the price of their stock and I think this is slowly starting t sink in a little, not much yet but a little:) One day I think you are going to get your real opportunity to shine here as it just is what it is with models and numbers and how some have used them for profit only with little regard for consumers on what the so called “unintended consequences” are. I kind of say that in jest to a degree as they don’t really even give that a second thought until they have to look at it when everything hits the fan.
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And on the flip side, does anybody believe that when the market goes down and companies do poorly, that individuals will do well?
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Yes, sometimes.
I wouldn’t say that directly harming corporations generally helps individuals. But it can certainly happen for people to do well while corporate profits are declining, as is the opposite. The two are not closely related.
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I’m curious whether Cathy or anyone else actually believes like Josh that individuals can do well when companies are doing poorly. I find that very hard to believe.
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Japan?
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This market is starting to feel like Japan in 1988-89. Lofty and unsustainable. Whether Japanese consumers benefited from Japan’s lost decades is a good question. If Bloomberg has his way we’ll all be living in Tokyo sized tiny box apartments.
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What I find hard to believe is that individuals can do well when companies are reporting gigantic profits.
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Bobito, are you self-employed, unemployed, employed by a government entity? Usually when companies make huge profits, their employees do well and fuel the economy. Look at all the millionaires in Silicon Valley and at companies like Microsoft.
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I say believe in Peter Lynch, to wit: “I have no idea where the stock market is going to be tomorrow or next month or next year. But I do know that as the economy grows, as corporate earnings grow, the prices of stocks will grow, and therefore the odds are that five years from now stocks will be higher than they are today.” Anyone who observed that maxim in 2008-9 as the market was collapsing did very well indeed.
I was a graduate of Stanford GSB back when people were just learning the Efficient Market theory and the Capital Asset Pricing Model and a lot of other stuff which has since been shown to be bunk. Alpha, beta and Sharpe ratio were not widely computed, and heads of investment banks, God help me, thought that the cost of capital was the inverse of the P/E ratio. Over the years I learned that the market is not efficient, that it reacts to the news when it occurs even though it’s been widely expected for a long time, and that all markets can be manipulated for an extended period of time until the manipulator stares takeout (regulatory or financial) in the face. The market is a device for measuring the balance of fear and greed in the marketplace about any set of economic expectations, micro and macro. In the short run. It discounts the future very inaccurately, gyrates on rumor and typically over-reacts on the upside and the downside. In the long run it’s pretty darn good. And I have some advice for all you right-wing doomsayers out there: Never bet long-term against the eagle with the thunderbolts in his talons.
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Who, that has spent any time in finance, uses the Dow instead of the S&P 500?
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The correlation between the Dow 30 and the S&P 500 would seem to be remarkable, given that the former is price-weighted while the latter is capitalization-weighted. But it is precisely the arbitrary addition and deletion to the Dow which allows this correlation to be maintained. Hence, and I say this with over a quarter century experience in finance, for the purposes of Cathy’s argument there really is no difference.
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The “easy money” effect has already been determined to have contributed to less than 50% of the current price level.
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Further, the biggest flood of international money has been into Japan over the period your graph covers—including investment from US based hedge funds.
Your market commentary needs some refinement.
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And finally, the “fight to quality” effect doesn’t really work the same in equities as it does in interest rates. As a rule of thumb: if it’s bad for European equities, then it’s bad for US equities. The indeces are far more correlated than they are competitive.
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*flight to quality
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Sorry, I just need to leave you with a graph.
As you can see, Europe and US equity markets have performed identically in the past year, while Japan has exploded.
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It’s a good point and it’s true going further back too – Europe and the US have similar looking graphs. But it doesn’t change the fact that in neither case does it matter much for the average person. Especially in Southern Europe, for that matter. See for example this.
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I disagree with Greene’s simplistic commentary. Her only evidence is current quarter gdp growth rates. That’s nonsensical when producing valuations. If you’re looking at the risk premium relative to the European bond rate, it is arguably still cheap.
As Falkenstein has previously noted, capital market economists are primarily lonely token positions and always ignored: http://falkenblog.blogspot.com/2013/01/signal-and-noise-seems-better-than-it-is.html
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