On Record Highs: The Dow and Paranoia

flickr--creative commons

flickr–creative commons

We’ve just witnessed a historic event.

Last Tuesday, the Dow — a benchmark for stock market strength — cruised to 14,285, well passed the former record set in Oct. 2007. As of Friday, the Dow rested at 14,397. And there was a collective shoulder shrug.

That reaction was in contrast to the heady days of stock market gains in the 1980s and 1990s when each Dow and Nasdaq record was reported breathlessly for days. It was a moveable feast.

So, what’s different about this record?

First, people are paranoid because the last record in Oct. 2007 was soon followed by an almost complete economic collapse. Within months of this record the Dow plummeted, losing half of its value and bouncing along those bottoms for years. Investors are wary of the same happening again.

They have statistical reasons to be wary. Raw economic numbers — GDP growth and employment, for instance — are not even close to the strength that led up to the rally in 2007. The housing market? It’s still a basket case. Also, the stock market gains are based a lot on government — especially the Fed — tampering with the numbers. Cheap dollars have fueled the rally.

However, it may be a mistake to hold this view on the economy exclusively. Remember fear can be just as damaging to your portfolio as greed. Also, remember that time has a way of balancing prices. What was up, might come down a little; what was down, may end up higher.

If the economy is still weak and the Dow can perform well, what if the economy becomes stronger? If the economy becomes stronger and, psychologically, at least, investors begin to shake of the fear that has kept the market down, we should expect to see continued growth of both the Dow and NASDAQ. I read a recent statistic that the Dow — because of inflation — is still five years from a true high and well below commodities.  This is a warning to investors, but if you have the risk tolerance for a shaky few years, there’s still a lot of potential in stocks.

Two ways of reading the same data.

Which is what makes investing and trading so interesting.

It would be great to hear your opinion!