stock bubble burst. So when the Dow delivered a nice pre-holiday present last week by regaining its five-digit status, you didn’t see people breaking out champagne or balloons or recalculating plans to see if they could retire at 32.
With good reason. Because for years, the stock market’s been delivering lumps of coal rather than presents. Despite its nifty 20 percent rise this year, the Dow is only where it was five years ago. Had the bull market continued its breathtaking annual gains, we’d be looking at a 20,000 Dow. Instead, the Dow has been what Wall Street calls “dead money” for almost five years. The broader market has been worse than dead–decomposing money, as it were. On Thursday, the 30-stock Dow closed at virtually the same level as on March 29, 1999, its first five-digit close. But the much more representative Standard & Poor’s 500 was down 18 percent since then, the NASDAQ down 22 per-cent. The total value of the U.S. stock market was $1.1 trillion below what it was on the Dow’s big day in 1999, according to Wilshire Associates–and almost $5 trillion below its record high, reached in March 2000.
But hey, everything’s relative. Although the market’s lower than it used to be, it’s a helluva lot higher than it was just this past March, when the Dow was in the 7000s. Overall, it’s been a good year for stocks, with the S&P (up 22 percent) and the NASDAQ (46 percent) doing even better than the Dow. But the fact that we’re feeling so good about this year’s rise shows how much the world has changed since the market collapsed. From the bull market’s onset in August 1982 through its peak in March 2000, the S&P produced an average of 20 percent a year in capital gains and dividends, according to Ibbotson Associates. In other words, this year would once have been slightly above average. Now it feels like a kiss from the market gods.
Milestones are sort of fun, even if, like Dow 10,000, they’re more symbol than substance. Had the Dow stocks each closed 4 cents lower on Thursday, the Dow would have finished at 9999 rather than 10,008. Is that a significant difference? Obviously not. But a nice round Dow number gets your attention. And it prompts me–and, I hope, you–to take a fresh look at things rather than continuing on autopilot.
It’s now clear that in March, when economic gloom was rampant, it was time to buy stocks. (Some of us even did that.) But unless you have a working time machine, you can’t revisit the past. With hopeful economic signs now abounding, is it time to plunge into the market? Maybe not. “Good earnings news and good economic news doesn’t necessarily equal a good market,” says Tobias Levkovich, chief U.S. equity strategist for Smith Barney. That’s because today’s stock prices already reflect optimistic assumptions. Levkovich predicts strong economic growth and rising corporate profits for next year–but lower stock prices. He’s forecasting that the Dow and S&P will finish 2004 about 3 and 4 percent, respectively, below their current levels. It’s because he expects interest rates to rise, and investors to place a lower value on each dollar of corporate profits than they do now. (In Wall Street parlance, Levkovich expects the market’s price-to-earnings multiple to shrink.)
If you’ve got a playful nature and are into numerology, you might want to go slow on stocks. This “analysis” is based on the two previous occasions that the Dow passed a milestone that begins with the numeral one. The Dow first broke 100 in 1906–but fell below 100 as late as March 1938. It first broke 1000 in January 1966–but was down in three digits as late as December 1982. So it took 32 and 16 years, respectively, to leave those milestones behind. Carry this pattern to its logical–or illogical–conclusion, and you go from 32 and 16 to 8. Because the Dow first broke 10,000 in 1999, this pattern would suggest it will take until 2007 to permanently move above that level. Given some signs of froth in the market–initial public offerings of Chinese companies are all the rage, low-quality stocks are soaring, people are talking about Google’s going public with a ridiculous $25 billion valuation–that may actually turn out to be right. For what it’s worth, I was optimistic about stocks when gloom and doom prevailed, but I’m now starting to take some of my profits off the table.
So let’s accept our gift from the market and celebrate Dow 10K–but not too wildly. And don’t put all those dow 10,000 caps in the museum just yet. We may need them again in a few years.
