November 10, 2009

The 10,226.94-Point Dow Doesn’t Matter, Either

Last month the Dow hit 10,000 for the first time since the 2008 financial crisis.  That same day I wrote a blog cautioning those who celebrated the number as a sign of post-recession resurgence.

Last Friday the Department of Labor released its latest report.  The news is decidedly grim.  Despite a climbing Dow and increased investor confidence, unemployment currently hovers at 10.2% (17.5%+ if you consider underemployed workers).

Last night the Dow rallied again to close at 10,226.94, its highest finish since Oct. 3, 2008.  Meanwhile, the predicament of the American worker remains the same.  By year’s end, 9.36 million men and women will be out of a job.  The Dow’s showing, though encouraging, doesn’t reflect the struggle to survive on Main Street.  In fact, there is an unfortunate inverse relationship emerging: as the Dow increases, the number of jobs decreases.  As financial markets improve, the real economy’s condition worsens.

It is not that the Dow increase doesn’t reflect any improvement – it’s a positive sign that investor confidence is on the rise.  But to tout it as the first charge of an 18-year bull market (as pundits are doing in likening our situation to the 1983 market upswing) is irresponsible and misleading.

Henry Blodget wrote an insightful piece yesterday to explain why 2009 is so vastly different from 1983, and why we’re not necessarily on a repeat course.  On top of stocks already being expensive and consumers staring down nearly 100% more debt, interest rates are currently at rock bottom (it was a decrease in record high rates beginning in 1983 which helped usher in the Bull Market).

What concerns me is the speed with which the media, certain economists, and many on Wall Street assume that one minor improvement is the first flake in a growing snowball of profit.  By hastily taking advantage of rock-bottom interest rates and a falling dollar – and betting on governments’ sustained stimulus-supported economy – investors risk creating a recovery bubble that has the potential to burst when stimuli are removed. 

In effect, this latest jump could become the spike before another lull; or worse, a plummet. 

It’s imperative we not assume that Dow jumps or dollar rebounds will automatically spark an inevitable recovery.  At this point, nothing is inevitable – neither the speed of recovery nor the shape of the recovery itself.  We must continue to look for long-lasting solutions, such as abstaining from short-term investing and incentivizing responsible behavior

Make no mistake – it’s not 1983.  Don’t uncork the champagne just yet.