By Milton Ezrati
The venerable Dow Jones Industrial Stock Index recently celebrated an anniversary—one year since it first reached a level of 15,000. Though the event is more psychological than economic, financial, or historical, still such milestones should prompt reflection on where the stock market has been, why, and where it will likely go.
This recent record was atypically long in coming. When the Dow Jones passed 15,000 last year, it had been fourteen years since it first crossed the comparable milestone of 10,000 and fully five years since it first touched 14,000. It must have seemed like an eternity for investors, who in the 1990s had seen the Dow Jones double in just three years from 5,000 in 1996 to 10,000 in 1999 after having seen it double in just the seven prior years. The hiatus must have been still more oppressive, because this slower, later gain was an increase of only a fifty percent. But the long wait may be paying off. In this past year since first setting the 15,000 record, the Dow Jones seems to have recaptured its earlier, faster-moving pace. It took only a few months to gain another 1,000 points and reach 16,000 and now, barely six months after that, the index has climbed more than half way to 17,000.
It might offer more confidence still to note that a pattern of quick gains after a record has good grounding in market history. Because the stock market as a whole, and by extension any valid stock index, is nothing more than a financial reflection of the economy’s productive power, it tends to continue rising to new records as long as the economy continues to expand. Sometimes the market runs ahead of the economic fundamentals, and sometimes it might lag them, but the basic relationship holds up over time. This established link did break down earlier in this century in part because the Dow Jones had gotten ahead of itself in the late 1990s but mostly because the war on terror first and then the real estate collapse of 2008-09 called into question the security of country’s economic fundamentals. Now, even the current, disappointingly slow recovery seems to have restored sufficient confidence in these fundamentals to re-establish the historical pattern. Someday, no doubt, an economic set back will prompt the Dow Jones to fall, but for the time being this recovery, slow as it is, offers the secure fundamental support that in the past has allowed new records to follow after a major milestone.
MILTON EZRATI is senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capitol at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, deals with the link between aging demographics, globalization, and the radical changes these will bring to all developed economies.
