Breaking new records, the Dow defies politics, punditry
Another day, another new high for the Dow Jones industrial average. On Thursday, after being down all day, the Dow rallied to close at a record 23,163. A day earlier, the widely followed index closed above 23,000 for the first time.
Turmoil leaves investors unfazed
Just eight-and-a-half years ago, in the midst of the Great Recession, the Dow closed at mere 6,547. At the time, President Obama assumed the role of broker in chief, saying that “buying stocks is a potentially good deal.”
He was right about that. In the ensuing years, the market defied Republican-leaning pundits who warned that the policies of the Federal Reserve and the Obama administration would punish stocks. More recently, it has defied Democratic-leaning pundits who said the chaos of the Trump administration would spill into markets.
What gives here? How can stock indexes keep rising for so long even as the news outside seems so bad?
One obvious explanation is that politics and punditry have far less impact on the stock market than people sometimes think.
Investors look first to tangible data on corporate profits, which have been robust and growing for some time. Indeed, Wednesday’s gains were attributed largely to an upbeat earnings report from IBM, a member of the Dow 30.
Second, they look to indications on which way the economy is likely to head. And here, too, the data back up the optimism.
After a soft period in the second half of 2015 and the first half of 2016, growth in America has picked up. The pickup abroad has been even more encouraging. Much of Latin America had been in outright recession but is now recovering. Europe is pulling out of economic stagnation. And Asian growth is accelerating. All this is beneficial for U.S. multinationals.
A third explanation is that interest rates have been so low for so long that investors chasing higher returns have little alternative but to buy equities.
For all the good news about stocks, there are, as always, reasons to fret. Investors have a long history of pushing stocks too high in periods of optimism and too low in moments of despair. And when they have a change of sentiment, stocks can go on a wild ride in a flash.
One reminder that what goes up can come down: Thursday happened to be exactly 30 years since the worst day in stock market history, when the market plunged 22.6%. That would be 5,234 points today.
The anniversary passed quietly, but investors seem to have pushed stocks at least a little on the high side.
The standard metric, a ratio of the average cost of stocks divided by the average profits they bring in, is running well above historical averages. In addition, investors might be overestimating the prospects for a major tax overhaul and underestimating the damage an erratic, impulsive president can do.
A prudent investor should also take note of the long history of markets. If there is one thing that is abundantly clear, it is that they will make fools of those who make predictions.