Sunday, March 24, 2013

Dow’s Record Close: Hooray or Humbug?

Getty ImagesMore fireworks needed

The Dow Jones Industrial Average closed at 14,253.77 today, a record for the 30-stock index that’s often viewed as a bellwether for the stock market.

The Dow rose 125.95 points Tuesday, a 0.9% gain, to surpass the previous record, 14,164.53 on Oct. 9, 2007.

The significance is heightened because it’s been a bumpy ride to reach the record. The Dow’s risen 118% since it hit a low of�6,547.05 on March 9, 2009 — a nadir that, following the financial crisis of 2008, seemed to shake the foundations of the market and very notion of stock investing.

So today we can say the market has finally recovered from that damage, and done so while other markets have struggled. As Ben Levisohn points out, while emerging markets (so often the fashionable darlings) seemed to quickly recover from the crisis, in the last couple of years they’ve lagged US stocks. And it’s even worse with China, which is about 60% below its record highs from October 2007.

It’s a similar story across the Atlantic, as Jonathan Buck writes in this week’s Barron’s:�

European and U.S. equities touched their post-2007 lows on the same date�March 9, 2009�but their fortunes decoupled shortly after. Decisive action by the Federal Reserve through quantitative easing paved the way for U.S. stocks to bounce back quickly, while the European Central Bank dithered. That hesitation has proved costly: At a time when the Dow Jones Industrial Average is reaching a new peak, the Stoxx Europe 600 index languishes about 40% below its all-time high.

So yes, there are reasons to celebrate today’s milestone, especially as data regarding jobs, autosales, housing and manufacturing all seem to be moving in the right direction. Maybe the Dow’s record is a harbinger of better times ahead.

But at the same time, there’s more than enough to still worry about. Higher gasoline prices, unemployment stuck at close to 8%, uncertainty about Europe and, of course, the dysfunction in Washington DC. Add it all up and investors are still jittery, as Kopin Tan notes; it may not take much to push investors towards the exits.

Then of course, there are the numbers. As I’ve said before, we’re still a ways from the record in inflation-adjusted terms — and if you include dividends then the Dow set a new mark in January 2012.

And let’s not forget the real-world effects, the impact the Dow’s plunge and climb back over the past five-and-a-half years had on retirement accounts. MarketWatch’s Matthew Heimer makes a series of (occasionally speculative) calculations and comes to the following conclusion:

The extra trillion-plus that [401(k) and IRA] investors accumulated in the five-and-a-half years after the last high doesn�t look that impressive in percentage terms: It represents gains of about 2.4% a year. And adjusted for inflation, balances have risen by a�total�of just 1.46%�for an annualized return that�s a hair under 0.3%. Again, we don�t know how exactly that number reflects actual investment performance (see all the caveats above). But considering that many retirement-planning scenarios count on a pre-inflation return of 6% or more, it certainly suggests that many savers remain well behind where they�d hoped to be.

Perhaps, now that the Dow has regained its 2007 footing, those investors can start to dream about finally moving forward. As Gene Epstein wrote last year:

Based on cyclical patterns of market history, the odds are better than two chances in three that the Dow Jones Industrial Average will reach 15,000 or higher over the next two years. Based on the same cyclical patterns, there’s about a 50-50 chance that the Dow could hit 17,000 or more.

Here’s a video of Kopin making the bullish case for stocks, even after today’s record:

Click to Play

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