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By Danielle Kurtzleben
Uncertainty still reigns in stock markets, and the Dow can be misleading
The Dow Jones Industrial Average hit 13,000 recently, marking a major post-recession milestone for the stock market index.
The last time the Dow hit 13,000 was May 2008, before the collapse of Bear Stearns and Lehman Brothers kicked off an international financial crisis. With an economy still climbing back from that catastrophe, the 13,000 mark is a psychological milestone for investors and shows that confidence is on the rebound.
"It's a nice round number. The interesting thing is we did the same when it hit 11 [thousand], we did the same when it hit 12, and now 13 is really...the furthest we've seen it go since May of 2008," says Chris Hobart, president of Hobart Financial Group, a private wealth management firm in Charlotte, North Carolina. "While the economy is still crazy, [and] there's still stuff to be nervous about...it does show that the economy is steadily trending forward, even with the high unemployment that continues to plague us as a nation."
Still, it seems like an arbitrary milestone, similar to watching the car odometer flip to the next thousand -- exciting yet no more meaningful than the next tick upward. And unlike a car odometer, the Dow can be misleading, and can also easily flip backwards again -- after a few brushes with 13,000 on recently, it receded to around 12,950 later in the afternoon.
In other words, there's reason for optimism, but only if accompanied with a dose of caution. Here's why the Dow's latest milestone isn't necessarily a reason to celebrate.
Uncertainty Is Everywhere.
Relief at the E.U.'s latest bailout for Greece allowed the Dow to creep above the 13,000 mark, but Greek debt problems are far from over, as it faces more years of austerity. In addition, Greece's potential impact on the global economy is minor compared to what could come from larger E.U. countries with massive debt, like Italy.
"The market just wants to see that the euro survives this debt scare over there and doesn't become a Lehman Brothers, where capital is going to freeze," says Mark Lamkin, CEO and president of Lamkin Wealth Management in Louisville, Kentucky.
If Europe continues its slide into recession, that could be an even bigger drag on global economic growth. Add in spiking gas prices and there is plenty of potential for a continuing drag on growth.
The Dow Isn't the Best Indicator.
"We tend to look at the Dow because it's one of the oldest indices out there," says Hobart, but broader looks at the stock market might tell a different story. The Dow represents 30 companies, he says, and those companies are not representative of the economy as a whole. For example, the Dow doesn't include heavy hitters like Citigroup, Apple or ConocoPhillips.
The S&P 500 is a broader barometer of market health and investor confidence. "The Dow is a little bit of an antiquated way to judge the market," says Hobart.
Trajectory Matters, Too.
Shortly after hitting 13,000 in May 2008, the market tanked to 11,100 in July, eventually bottoming out at around 6,600 in early 2009. So while the number is the same now as in May 2008, the direction is the exact opposite, making for a much different scenario.
"Trajectory makes a big difference. We've got high unemployment, but our debt situation [for individuals and businesses] is much, much healthier," says Hobart.
Though plenty of other economic indicators are worse than they were back then -- unemployment is nearly 3 percentage points higher, and poverty is still growing -- the Dow's volatile but decidedly upward trajectory betrays optimism that things will improve further.
In other words, 13,000 is still just a number. The market is arguably in a much better place than it was the last time it passed 13,000.
Investing - Why the Dow Hitting 13,000 Isn't a Major Milestone | Successful Investing
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