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The Economist: The Dow now




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The author of this entry is responsible for this content, which is not edited by the Wilson County News or wilsoncountynews.com.
Dr. M. Ray Perryman
March 7, 2013 | 421 views | 13 comments

The Dow Jones Industrial Average recently reached an all-time high, finally surpassing October 2007’s 14,164. True, this is a “nominal” record level, meaning that if you adjust for inflation over the past few years, we are still below the prior peak. Even so, it’s cause for celebration, conversation, or even consternation depending on your perspective and portfolio.

The interim between “then” and “now” has been anything but smooth, both for the economy and for equity markets. In 2007, unemployment stood at 4.7%, and GDP had been expanding for years. The housing market was strong, with prices rising and new construction continuing. However, within months, the financial crisis and ensuing global economic downturn slammed the Dow down, and by March 2009, it had fallen to 6,547.

The economy’s return to growth was assisted by unprecedented actions by the Federal Reserve Bank, which injected trillions into the system through a series of “quantitative easing” programs. The federal government also joined in, with a huge stimulus package. Even so, the recovery has been frustratingly slow, and ongoing shenanigans such as December’s near miss on the fiscal cliff have threatened to stop progress entirely.

The bottom line is that the 2012 economy is rather different from that of 2007, and the specter of the recent downturn remains fairly vivid. Now, 7.9% of the workforce is unemployed (with millions more Americans so discouraged they have totally stopped looking and are no longer counted). The economy has been growing, but sluggishly. And while the housing market is finally showing signs of life, some markets remain loaded with excess inventories which will take time to work off. Similar situations are being faced around the globe, many with greater challenges than here in the United States.

It is within this context that the companies which comprise equity markets are functioning. Since 2007 and the subsequent fall, some companies have recovered all of the value they lost and then some, but others are still down significantly. This uneven performance stems from a variety of factors. In some cases, corporate leadership shifted focus in directions which have enhanced growth and profitability; others were wrong about strategy and are now paying the price in the form of lower sales and profits (and, hence, stock prices). Other firms are still dealing with fallout from global conditions and have not yet trended back upward.

It is noteworthy that it is only the Dow which has surpassed its prior high level. Driven by relatively few stocks (30, to be precise), stellar (or abysmal) performance by any one company can have a marked effect on the index. An analyst with Standard & Poor’s estimated that about 12% of the rise can be attributed to just one stock: I.B.M., which made a good move toward a software focus. Another interesting note is that if Apple had been in the Dow, it would be significantly lower given the slide in that one company’s stock price.

The broader market measure represented by the S&P 500 index, which includes (as the name implies) 500 corporations, hasn’t yet topped its prior high (also in October 2007). It is close, though, within a percentage point or two as we go to press. The technology-intensive NASDAQ is at a 12-year high, but is still 35% below its record high of 5,048 set in March 2000 before the dot.com bust of the early 2000s. Years (or even decades) may pass before the NASDAQ reaches that level again.

The fact that the market has passed this milestone now is particularly interesting given the turmoil in Washington, DC, with sequestration kicking in and a debt ceiling debate looming, and the less-than-ideal condition of the economy. In hindsight, we know that 2007 was a time of overinflated financials and a massive housing bubble. And now? Looking through the day’s headlines reveals highly respected pundits with opinions all over the map: room to go much higher, destined for a fall, stocks overpriced, stocks underpriced.

For those potential investors who are lamenting the fact that they missed the recent upswing, the difficulty lies in now determining whether/when to get in to avoid buying high (and losing later when selling low). Individuals with swelling portfolios may be wondering when to sell so as to preserve profits. Good questions.

Predicting the future of the stock market is virtually impossible (at least over the short term). While underlying economic conditions are a huge aspect of price levels, there are other factors at work. It’s certainly a good sign that equities have been able to recover and the milestone is worthy of note. However, unresolved issues such as deficit/debt concerns are muting the impact of the market’s achievement.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
 
« Previous Blog Entry (March 6, 2013)
 


Your Opinions and Comments
 
4 th Generation Texan  
Sutherland Springs  
March 16 at 4:50pm
 		  
I wish that huge bottomed Michell and that mickey-mouse eared BHO would go away. They have a lot of nerve thinking their moronish thinking would produce answers to any of ... Read More Read More
 
 
Alvin Charmaine  
March 15 at 2:09am
 		  
I'm a little peaved that I missed this upsurge. I have had too much money in bonds. Nothing to do but wait for the next crash in about a month or so.
 
 
4 th Generation Texan  
Sutherland Springs  
March 14 at 11:41pm
 		  
Perryman is a fool. An absolute blooming fool. What do you think is gonna happen when the fed stops propping the economy up by not printing money and we start seeing inflation ... Read More Read More
 
 
One Voice  
Floresville  
March 14 at 2:48pm
 		  
Amen
 
 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 14 at 2:47pm
 		  
Why in the world would I need any more money. My every
need is being satisfied. I hope you reach that level
someday. Let need, not greed guide your life and you
too ... Read More Read More
 
 
Facts only please  
TX  
March 14 at 12:53pm
 		  
Prairie/Squawk: I just check my count...you guys need to invest in "I Fund International Stock Index" to understand how much money is possible with the right ... Read More Read More
 
 
PRAIRIE GROUCH  
GRAND PRAIRIE TX  
March 14 at 10:42am
 		  
Facts......15k in 2007 dollars equal 16,659.00 in
2013 dollars, so it appears that you have a way to
go before you get back to your peak under Bush.
Life will always have ... Read More Read More
 
 
squawk box  
Pandora, Tx  
March 14 at 10:23am
 		  
Facts.......CPI school
Dow high Obama 14513 2013 dollars
Dow high Bush 14159 2007 dollars

Dow high Bush 15725 in 2013 dollars
 
 
Facts only please  
TX  
March 14 at 10:21am
 		  
squawk: One fund had 7K in it in 2003. It was at 15K when Bush took office. Shortly after (Before Obama) it fell to 7K. Now it is back to 15K and going up every day. ... Read More Read More
 
 
squawk box  
Pandora, Tx  
March 14 at 9:34am
 		  
FACTS ONLY PLEASE......I'm just curious. Are you basing
your 401k gain percentage on the highest amount or
the lowest amount that you had before or after the
last economic ... Read More Read More
 

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