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 MSNBC.com |
Happy Anniversary to the Dow's High
Jan. 9, 2006 issue - There's nothing like a looming anniversary to make you contemplate some of life's bigger questions. And we're closing in on a big date for us stock-market types: six years since the record high of the Dow Jones industrial average.
On Jan. 14, 2000, the Dow closed at 11,727.98, up more than 140 points on the day. Market mania was in full swing. The economy was in a stock-fueled boom, and Internet giant America Online had just announced its purchase of Time Warner, with analysts gushing about how that brilliant deal would transform the media landscape.
It seemed only a matter of time until we saw the Dow at 12,000 and 20,000 and points beyond. Instead, the Dow swooned after setting that record high, then plummeted and has since rebounded.
Why am I inflicting all this history on you? To make a point: that true love may last forever, but in the financial markets, nothing does. That's true regardless of whether we're talking about stocks or houses or today's favorites like oil or gold.
Six years ago, almost everyone except a few old grumps was saying that the traditional ways of valuing stocks were obsolete, and that stocks would go up forever. They didn't. By the time the Dow bottomed in the fall of 2002, reverse polarity had set in and seers were predicting a new era of lower stock prices. Instead, the market turned around.
You can see some old-time triumphalism seeping back as the Dow flirts with 11,000, a number that has absolutely no economic value and only limited psychological value.
Besides, focusing on the daily Dow means you're looking at details and missing the big picture. Which is this: stocks, as defined both by the narrow 30-stock Dow average and by useful broad indexes, such as the Standard & Poor's 500 and the Dow Jones Wilshire 5000, are still below where they were six years ago. (We won't even talk about the NASDAQ, still more than 50 percent below its high.) Had stock prices continued rising at their historical rate, the Dow would now be about 18,000—more than half again as high as it is now.
Stocks, as measured by the S&P 500, returned almost 20 percent a year, compounded, from August 1982 through early 2000. An entire investing generation got used to seeing the value of its portfolio double every 3.5 years or so. That created an environment in which your 401(k) almost couldn't help but do well, and people like President Bush could tout private Social Security stock-market accounts as a way to make millions of Americans rich without his being immediately laughed down.
But that bull market, which saw the Dow rise 1,400 percent in less than 18 years, is so over. The odds of seeing anything like it in our lifetime are, at best, remote.
Finally, the fact that we're even discussing the Dow shows the power of history and myth. The Dow, created in 1898, is an arithmetical average calculated by adding up the share prices of 30 stocks and dividing the total by a wonderfully precise number, most recently 0.12493117. The SP and the Wilshire are much more important, broad-based indexes that are keyed to the stock market's overall value.
In the S&P, a dollar change in Microsoft's 10.6 billion shares counts about 18 times as much as a dollar change in General Motors' 565 million shares. But in the Dow, a dollar change in either stock moves the average by the same 8.004 points.
Dow Jones says about $21 billion of investments are tied to the industrial average. S&P says $1.1 trillion—50 times as much—is tied to the 500, which is the benchmark analysts use to measure investment performance. Yet when people ask whether the market's up or down, I tell them about the Dow. Go figure.
But enough already. Why ruin a perfectly good anniversary with all this heavy thinking? I don't know about you, but next week I'll be thinking about singing happy anniversary and eating cake. Regardless of whether the Dow—or the stock market—is going up or down.
© 2006 MSNBC.com
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