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Dow sets all-time record: Cautious optimism ensues

New York Stock Exchange Credit: Photo: Flickr User natalief

The Dow Jones Industrial Average crossed a threshold yesterday.

When the stock index hit 14,253.77 — up 125 points for the day — it broke the old record of 14,164.53, set Tuesday, Oct. 9, 2007, before the Great Recession hit.

The experts say the new market record is a reflection of the recovering economy. Well, maybe.

It is true that the U.S. economy has showed steady though not spectacular growth over the past few years, and U.S. companies are generally reporting good profits. But the most recent report for Gross Domestic Product, the sum of all the economic activity in the country, showed the economy barely grew in the fourth quarter last year, inching up 0.1 percent — and grew just 2.2 percent for the year. And yesterday’s record market gains come despite the fact that unemployment remains high and job growth is minimal. The state Economic and Forecast Council reported recently that there are still more than 70,000 fewer jobs in the state today compared with pre-recession levels.

And let’s not forget the effect of last Friday’s “sequestration” spending cuts, which are expected to slow economic growth. Point is: Not all market watchers are enthusiastic about the Dow’s record rally.

“That we were last near these levels in the fall of 2007 with a very different sort of economy seems to get lost in translation,” said Bob Ward, a financial adviser with Wedbush Securities here. “But then trillions of dollars of newly minted money does make a difference.”

For perspective, Ward says to consider the then and now:

  • GDP Growth: +2.5%; now +1.6%
  • Unemployed in the labor force: 6.7 million; now 13.2 million
  • Food Stamps usage: 26.9 million; now 47.7 million
  • Federal Reserve balance sheet: $0.9 trillion; now $3.0 trillion
  • Total US debt: $9.0 trillion; now $16.6 trillion

“We all like higher securities prices, just as we enjoyed higher real estate prices,” Ward continues. “However, higher prices are not a predictor of future returns. Prudent consideration of reality as you perceive it versus headlines is always warranted.

“Is our economy organically, sustainably driving wealth creation? Or does simply creating new money create wealth? Enjoy the rally. Invest thoughtfully.”

The Dow Jones Industrial Average is more an example of great branding than a reliable indicator of economic health. The Dow has become synonymous with the stock market at large, even though it is probably one of the worst measures of how the total stock market is actually doing.

The 30 companies, including Microsoft and Boeing, that make up the Dow are a relatively small slice of the 5,000 domestic stocks actively traded among all the exchanges. (There are about 15,000 “public” companies in the U.S., but two-thirds are traded on over-the-counter markets or have few shares held in public hands.) And the “industrial” average is hardly industrial anymore, loaded as it is with companies such as McDonald’s, AT&T, Walt Disney and United HealthCare. Some industrial remnants remain  (Caterpillar, Intel and IBM). But the Dow is really best described as a “blue chip” index — 30 large, well capitalized companies that reflect the major components of the economy.

The two other stock market indexes commonly quoted are the Standard & Poor’s 500 Stock Index, based on the market capitalization of the 500 largest publicly traded companies; and the NASDAQ Composite, which measures stocks in the technology heavy NASDAQ market.

Of the two, the S&P 500 is a much better measure since it includes so many companies. It was up strongly as well yesterday, closing at 1539.79, but still off its record 1,565.15 mark set in October 2007. The NASDAQ closed at 3,224.13, a long way from its previous record high of 5,046.86, set on March 9, 2000.

For a better window on how the stock market is doing, you need go no further than Russell Investments on Second Avenue in Seattle. Russell publishes some of the most followed and complete stock market indexes in the business, measuring the performance of the largest 3000 U.S. companies. The Russell 3000 represents approximately 98% of the investable U.S. equity market. The Dow was up 5.8 percent in January; the Russell 3000 was up 5.49 percent. For January, at least, both were tracking fairly well.

Stocks are back in pre-recession territory. GDP is now above where it was when the recession began. These two positive data points indicate that some parts of the economy have recovered. But it is still an economy that does not create jobs the way it used to — there are 13 million unemployed or under employed individuals in the country right now. Which means that while GDP has recovered, it is functioning with 4.5 million fewer jobs.

So, cheer the news of a record close for the stock market, at least the Dow Jones Industrial Average part of it. But understand that our economy still has a long way to go.

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