What Does the Rise of the Dow Really Mean?
Euphoria over the Dow Jones industrial average rocketing across the 14,000 mark in response to strong corporate earnings calls into question how rational the exuberance really is.
Earnings results Thursday from corporate stalwarts such as IBM propelled the stock market to a record close just over 14,000. The broader Standard & Poor's 500 index also surged to a record close of 1,553.
The Dow Jones industrial average is one of the stock indexes often cited as a benchmark of economic health.
David Leonhardt, an economics columnist for The New York Times offers perspective.
Linda Wertheimer: Does reaching 14,000 actually mean anything?
David Leonhardt: "The idea that the Dow has reached 14,000 really isn't particularly meaningful for a couple of reasons; and the first is that the idea that stocks are rising shouldn't particularly be newsworthy because the price of nearly everything rises, thanks to inflation. The government prints more money each year, and the price of bread and cars and stocks rise."
What about the idea that the Dow Jones industrial average represents, what, is it 30 companies? If you were going to look at economic health based on stocks would you do better to look at the Standard & Poor's index which is 500 stocks? Would that be a better measure?
"It absolutely would be a better measure. The Dow is a really interesting statistic. It was invented in the 19th Century by a man named Charles Dow. And when he invented it we didn't have nearly the sophisticated economic tools that we have today. So he actually invented a fairly rudimentary statistic. According to the Dow, a company like Caterpillar, which makes farm equipment and isn't actually that a big of a company, counts more towards the Dow and is considered more important than Microsoft, or Citigroup, or General Electric. And so while there were reasons for Charles Dow to do what he did, there really is no good reason for the rest of us to use the Dow as the main benchmark of the stock market."
You also write in your column this week that the stock market's recent highs don't tell us much about the health of investments either. Why is that?
"That's mainly because of inflation. One of the most disappointing things to me is even people who are professional commentators on the stock market don't take inflation into account. So you just see this line that basically goes up and up and up and up and up. It doesn't really get at the subtleties of the story. The stock market is only at a high when you don't consider inflation – when you don't compare it to everything else around us, when you don't compare it to the other investments that you could have made.
"The S&P 500 adjusted for inflation is actually still 17 percent below the peak that it reached in 2000. Now if you do a slightly more complicated calculation and you include the dividends that people make on their S&P 500 mutual funds, and you include the typical fees they have to pay, it's only 8 percent below its peak. But that's no record high.
"So the idea that that the stock market has never been better, which is really the implicit message in 'record-high stock market,' really isn't true."
You don't necessarily get rich investing in the stock market. What you mainly do is preserve your money, is that right?
"Over long periods of time you make money. If you set aside money when you're in your 20s and 30s and invest it in a diversified way — and don't pay really high fees to mutual fund managers who somehow persuade you that they know more than everybody else — you are likely to get a really nice return over long periods of time.
The thing that I think is unfortunate about all this hoopla surrounding Dow 14,000 is it causes people to think you get a really nice return almost always, and that's just not the way the world works."
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