As the Dow Jones Industrial Average powers through the 10,000-point threshold today, millions of investors are no doubt searching for meaning. But, is there any deep significance here?
For a handful of investors and math geeks, the Dow Jones’s index (DJIA) lost its relevance decades ago. Naysayers question why—in an economy as complex as our own—we bother fretting over the ups and downs of just 30 publicly-traded companies. Why not 50? How about 100 companies—or 500 like Standard & Poor’s less popular (but more comprehensive) S&P 500 index. Beyond the narrowness of its scope, there are legions of finance academics who dislike the Dow for its supposed mathematical flaws, including the index’s failure to account for returns investors garner from dividends issued by its component companies. Suffice to say, the Dow has haters. Even so, the DJIA is what we monitor more closely than our blood pressure. It’s what we talk about at parties. It remains the pulse-check of U.S. business.
Dow 10,000 is a familiar milestone. The DJIA pushed through the barrier for the first time in March 1999, propelled by the dot.com bubble’s final surge. For many market-watchers, the milestone was the crowning achievement of the longest bull market run in history. For some stubborn bulls that year, it meant even more: a counterargument to then Federal Reserve Chairman Alan Greenspan’s 1996 warning that the markets were somewhat overvalued—and that there was too much “irrational exuberance” among investors. (Greenspan sounded that alarm, by the way, when the Dow was around 6,300!) Of course, Greenspan was vindicated the next time we all met 10,000—on the way down in 2000.
Far be it for today’s investors to be impressed by Dow 10,000—not after we were lifted to the dizzying heights of 14,000 back in 2007. Still, let’s ponder this: the index is hitting 10,000 in the midst of a rally from the March 9, 2008 bottom of 6,547. That’s a pretty resilient surge—and one that fits the historic pattern of financial markets rebounding well before the actual economy recovers from recession.
Is there any irrational exuberance at play? I think so. As I wrote in September, I’m inclined to believe the many experts who sense that this rally is due for a slight pullback this fall or early in 2010. Rather than be a party-pooper, I culled Black Enterprise’s Rolodex for some finance professionals who are more hopeful than myself. I wanted to hear some rationale for the rally blowing past 10,000 and beyond. Ted Parrish, principal and director of investments at Hennsler Financial Group in Kennesaw, Georgia believes this surge has further to go. But he downplays the Dow’s 10,000 breakthrough. “I think the market has forward momentum, and I expect us to get to 11,000 by end of year,” Parrish says. “We have to go up 44% to get back to the high. Those numbers tell you that 10,000 isn’t that important based on where we’ve been. It’s psychologically important but not fundamentally important. We’re down 54% from the top. Hitting the all-time high again is more important.” Parrish says he expects that increasing numbers of companies will report earnings growth in upcoming quarters, powered by projected inventory building and corporate spending increases. “Consumer spending will probably improve too. They will start to loosen those purse strings,” he notes.
Eugene Profit, CEO of Profit Investment Management in Silver Spring, Maryland is a bit less giddy about the 10,000 mark. “It’s just a number,” he says. “It’s significant in that we’ve had quite a bounce off the bottom. But if you look at the reason why two-thirds of companies in the S&P exceeded analyst estimates in the third quarter, it was the result of job losses and cost cutting. Unemployment is going over 10%, which is extraordinarily high. It’s not the best economic environment.”
What does that mean for where the Dow goes from here? Says Profit: “We averted the disaster, but I don’t know that this rally is sustainable,” he warns. “It’s still a wait-and-see market. If you start to see companies spend more money in new machinery… I think we’re going to bounce around where we are until you see companies begin to loosen their purse strings. I don’t see a major pullback, but we need to give economic data a chance to catch up to what [stock] prices have done over the last six months.”
So, now that we’re at 10,000 again, should we party like it’s 1999? Probably not. For me, Dow 10,000 will never have the cache it did in the 1990s. Still, it signals investors’ collective need to put the extreme market losses of 2008 and 2009 behind them. In the constant flurry of bad-news numbers we’ve endured over the last few years, we could all use an excuse to celebrate.
John Simons is the senior personal finance editor of Black Enterprise