“Wall Street has had the breathless anticipation of a man waiting
for a sneeze that won’t quite come,” says The Economist. The Dow Jones Industrial Average’s move back towards its all-time closing high of 11,723 – set more than six years ago at the height of the dotcom bubble – is a “powerful symbol”, but the process has been a nervous flirtation rather than a decisive lunge; every time the bulls seemed to be in the ascendancy, concerns about inflation, growth, or both, have driven it back down.
In any case, many question how meaningful the Dow’s return to old highs is. Some complain that a nominal record means nothing; indeed, “the
Dow would need to pass 14,000 to even hit the old record in real terms”, points out iTulip.com. More significantly, as an economic barometer, “the Dow tells us nothing about how the average US stock is performing and little about the nation’s corporate health”, says Tom Stevenson in
The Daily Telegraph.
Unlike the FTSE 100, whose constituents are reshuffled quarterly and chosen on the basis of market capitalisation, the Dow’s are changed infrequently and picked by a committee on subjective grounds. The result is a bias towards large, old-economy stocks that are less affected by the business cycle. Another quirk is that while most stockmarket indices are weighted by market cap, the Dow is weighted by share price. This means that a rise in a high-priced share more than offsets a fall in another low-priced one. In fact, gains by a handful of stocks, such as Caterpillar and Altria, disguise the weak performance of most of the index, notes Barry Ritholz of Ritholz Research; only ten of the 30 Dow constituents are back to their 2000 prices, while 15 remain substantially lower.
All this makes it “absurd” that James Glassman, who in 2000 infamously predicted that the Dow would soon pass 36,000, is back on television talking up the bull case. “Since the last time I saw his schtick on TV in January 2000, the Dow has been handily outperformed by cash.”
Indeed, agrees Edward Chancellor on Breakingviews.com, even on highly optimistic assumptions for earnings growth and p/e multiples, the Dow is unlikely to achieve Glassman’s target until well into the mid-century.