Market 'milestone' more hype than substance

February 29, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Media outlets love nice, round numbers. So when the Dow Jones Industrial Average recently closed above 13,000 for the first time since 2008, there was quite a bit of fanfare in the press. The truth is, though, this type of landmark number is usually more hype than a significant measure of market conditions.

Un-curbed enthusiasm

After the Dow closed above 13,000, the Associated Press quoted one institutional investor as gushing that it was "a momentous day for investor confidence," and that the Dow regaining its 2008 level implied "that the financial crisis that we were all losing sleep over, it never happened, because now we're back."

Really? It's as if the financial crisis never happened?

Tell that to the people who are still out of work. Tell that to people whose retirement programs are way behind schedule because of all those years without net gains in the stock market. Tell that to people whose incomes have been crushed by low interest rates on savings accounts.

Three truths about 13,000

The Dow reaching 13,000 really doesn't qualify as "a momentous day." Here are three truths to put this landmark in perspective.

  1. Prices mean less than valuations. The level of the Dow Jones Industrial Average is determined by a collection of prices, and prices alone tell you very little about the condition of stocks. You need to know the valuation of stocks, which is how those prices compare to underlying fundamentals such as earnings, earnings growth rate, net asset value, cash flow, etc. All things considered, it is better for fundamentals to be improving than for prices to simply be higher.
  2. Nearly four years of dead money is nothing to celebrate. Most retirement savings plans are based on assumptions about stock market growth and interest rates. After the stock market has take years to simply retrace its steps, and with interest rates on savings accounts down near zero, those assumptions have been severely disappointed. This means retirement savings still need to dig out of a hole.
  3. Psychological barriers are all in the mind. Fundamentally, professional investors know that crossing 13,000 is no more significant than crossing 12,631 or 13,029, but they justify the hype by calling the round numbers a psychological barrier. That little game is all in the mind. The reality is, prices have no problem at all crashing through those supposed barriers on the way up during a rally, or on the way down during a panic.

So pop a champagne cork if you want, but only if you're in the mood for champagne. If you are looking to celebrate true progress, look for another sign of good news on the employment front, or any sign of good news from Europe, or perhaps an ease back in oil prices. Those things will tell you more about where the market is going than where it has already been.

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