by Brett Arends
Crossing the Threshold May Bring a Psychological Boost, But It Doesn't Mean You Should Jump Into Stocks
The Dow Jones Industrial Average has risen 1000 points since the middle of July, and several hundred points in just the last few trading sessions. At 9783, it's within hailing distance of 10000, a level not seen since last October.
What does this mean for you and your portfolio?
Not much. It's ten years and six months since we first passed the 10000 milestone. Since then we've passed it several more times—in both directions.
It doesn't even mean the markets are back to where they were: since the Dow first hit 10000 back in March 1999, the Department of Labor says the dollar has lost 23% of its purchasing power.
So in March 1999 dollars we're still only back to about Dow 7500. Thanks to inflation, each "Dow 10000" is worth less in real terms than the previous one.
Nevertheless, round, headline numbers can still have an effect on market psychology. Crossing 10000 pumped up market exuberance back in 1999, and falling below 10000 was another blow to investor psychology last year.
A fund manager I know suggested this week we might see a big run-up in the fourth quarter. The market, he said, might be forced higher as more people come off the sidelines—most likely at the worst possible moment. Institutional investors have been too cautious through the rally of the last six months. That's true for the public, too; they sold through the crash, and the latest data shows they were still selling shares in August.
Yet even if the market's rise attracts more investors, stocks are becoming less attractive long-term investments. Shares don't get better as they go higher. They get worse. A share is just a claim on future dividends. The more you pay, the worse the deal.
And a rising stock market does not necessarily mean the economy will keep getting better. The current rally ignores some ominous economic trends. Bank lending has slumped, and so, too, have long-term Treasury yields. Neither is a happy omen. And of course, in the real economy, the pain continues. Unemployment has risen to 9.7%, even as Wall Street has rallied.
The boring truth about Dow 10000? This is a dull stock market for investors-in-waiting. Shares overall are somewhat expensive, although not by crazy amounts.
According to FactSet Research, the U.S. market overall is nearly 17 times likely earnings. That's above long-term averages of maybe 14 times earnings. The dividend yield is low, at 2.1%, but we've seen lower. The picture is similar when you compare share valuations to company net asset values or sales.
Dow 10000 is no bargain, but it's no bubble either.