Dow 14,000, then and now
- Joshua M Brown
- February 1st, 2013
This morning the Dow Jones Industrial Average hit 14,000 for the first time since October 17, 2007.
The last time we got to 14,000 it was thanks to the explosive growth of infrastructure building and commodity consumption in the emerging markets along with a peaking credit bubble – the likes of which the world had never seen before. In those days, rappers and supermodels were demanding payment in euros, solar and ethanol stocks were taken seriously, Google was our Facebook and Apple had just launched its first-ever phone, to all kinds of skepticism and jeering. Among the most respected and admired companies in America were Hewlett-Packard, Lehman Brothers, General Electric and Goldman Sachs. Central banks around the world were in tightening mode and the cost of everything from natural gas to oil to grain to steel was making the world more difficult by the day.
This time we’re getting to 14,000 under different circumstances - benign inflation, an improving private sector jobs picture, home prices just starting to lift in many markets, a chastened and delevered banking system, two wars winding down and we’ve got an investor class that is obsessed with bonds and just beginning to show interest in stocks – January 2013 was the best monthly inflow to equity funds since 1996 after five of the worst years on record.
Contrast this attempt through 14k with the last one – by the time we made that new high in 2007, very few stocks were going up and the leaders were mainly commodity-related companies. The bank sector had actually peaked in July and was starting to sell-off by October. This winnowing of the new highs list and non-confirmation by such a key sector (Financials were almost 18% of the S&P at the time) was a massive red flag. No such flag waves today.
Obviously the key difference is that in the fall of 2007 the Federal Reserve was obsessed with inflation and had been in a tightening cycle that had gone on for too long after rates had been low for too long. This time, the Fed has been waging a war against deflation – specifically in the labor and housing markets – and it’s been losing despite gargantuan efforts up until recently.
As I frequently mention, the S&P is a better measure of the stock market than the Dow will ever be, but civilians don’t speak S&P, they speak Dow. When your mother asks your father what the market did that day, your father gives her the up or down number from the Dow Jones.
This weekend, every newspaper in America will tell their local civilian population where the Dow Jones is. It will come as a surprise to many non-players as they’ve been assuming all along that the market sucks. This is what the economic news has led them to believe – most people aren’t invested and truly don’t care to verify these assumptions.
The question is, how will the mass affluent react to this reality, this huge psychological milestone?
Americans have $41.8 trillion in financial assets. $28.6 trillion of that is in so-called investable assets and the other $13.2 trillion is in retirement accounts (401ks, pensions, etc).
$41.8 trillion is a big number. How much of it is under-invested and misallocated to wealth-destroying short-term instruments mistakenly perceived as being “risk-free”? How much of it will shift in part because of the Dow chatter that begins across America starting tonight?
For a laugh, read this CNN story from July 19th 2007, the first day the Dow broke 14,000. How blissfully ignorant we were about what was really happening beneath the surface:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.