Today, the Dow Jones Industrial Average (DJINDICES: ^DJI ) surpassed its previous all-time intraday high of 14,198.1, set in October 2007. Since then, we’ve been through a global financial crisis, a sovereign-debt crisis in Europe, a stimulus package in the U.S., the debt ceiling debate, and, most recently, sequestration cuts (just to name a few). The bottom line: It’s been a long half-decade for investors.
Through all of these challenges, the market has come back strong, and stocks have recovered losses that devastated portfolios around the world. Here’s what we should and shouldn’t care about today.
What we can read into the record
There’s no doubt this has been the most stressful time to be an investor in my lifetime. We haven’t seen financial and economic devastation quite like this since the Great Depression, but the U.S. economy has been amazingly resilient. The job isn’t done; unemployment is too high, the national debt is too great, and economic growth is still pretty anemic. But the Dow clearing a record high is one more psychological hurdle on our way to a recovery.
There are a few big reasons the Dow’s level is important in the current environment. Stocks are generally valued based on the past and future profits of a company, so a new high means investors see a good future. With that focus on the future, stocks are a leading indicator of the economy. For example, the market topped in October of 2007, nearly a year before Lehman Brothers collapsed, which is when panic really set in. If we’re hitting a new high now, it means investors are betting that the economy and company profits will improve in the future, which should be good for employment, profits, and even the deficit.
Why the psychology matters
I’m not one to put much stock in technical indicators, and I don’t think a new high is some magical “buy” signal, but it is an important psychological barrier, if nothing else. Investors are looking for ways to compare the current market to the past, and if we’re reaching a new high, then maybe the market is healthier than we think it is.
From a business perspective, it may be even more important. The Great Recession was fed by fear and uncertainty. When companies couldn’t see the bottom of the economic hole, they cut more, making the hole bigger and thus making for more cuts. It was a negative reinforcing cycle.
Today, the pieces are in place for the opposite end of the reinforcing loop. Companies have cash to invest, consumers are confident again, unemployment is falling (slowly), and forward-thinking companies are investing in the future. Does the Dow’s reaching a new high change any of these indicators? No, but when you cross a record high, it may give some reason to think the economy isn’t as bad as the politicians or pundits might say. If Wall Street has looked past the debt ceiling, the sequester, and unemployment, perhaps it’s time to hire some workers?
What today really means
What really happened today is that the 30 stocks chosen to compose the Dow Jones Industrial Average have crossed a milestone not seen in more than five years — nothing more.
Take that as an indication that the economy is recovering or that the worst of the Great Recession is behind us, but don’t think it’s a golden “buy” signal for investors. If you find a stock that’s a value today, it’s as good a day to buy as it was yesterday or will be tomorrow.
At the end of the day, today’s record only means we’ve gotten back to where we were more than five years ago — a depressing reminder for most investors.