Dow at 10,000: Good News for Main Street?

Many people are cheering the fact that the Dow Jones Industrials Average has reached an apparently signficant milestone -- 10,000 -- and are suggesting that it means good news for Main Street.

Yet even during more "normal" times, the relationship between the stock market and the economy has been rather tenuous, at least in the short run. Think back to the feeding frenzy that was occurring just over two years ago, when clueless traders pushed equity prices to all-time highs as the financial world and the real economy were undoubtedly falling apart.

Generally speaking, share prices can be influenced by any number of factors, not least of which is the mood of traders -- what some refer to as "animal spirits" -- and the amount of cash that is available for speculation -- er, investment. Conditions on Main Street don't always enter into it.

In the end, of course, if the fundamental reality fails to match or catch up with the exuberance of the trading crowd, then that sets the stage for a "recalibration"of some sort, which can be swift and violent if the differential has reached unusual extremes.

Is that where we are now? If you read the following sampling of commentaries discussing what I would describe as the Wall Street-Main Street disconnect, I think you'll find that the answer jumps right out at you:

"Why The 10,000 Point Dow Doesn’t Matter" (Bill George's Blog)

The Dow is at 10,000. Reporters glow. Retirees relax. Investors sigh: “Whew, we’ve made it.”

They’re wrong. This purported milestone isn’t a victory. It’s nonsense.

The market is the wrong place to look when measuring the health of our economy. The collective wisdom of mutual fund analysts was wrong in 1999, wrong in 2006, and it’s wrong right now.

"Art Cashin: How Today's Market Is Like Dot-Com Bubble" (CNBC Stock Blog)

The stock rally could have legs after a line of better-than-expected third-quarter earnings reports, but Art Cashin, head of floor operations at UBS, said he isn't yet convinced.

"The banquet looks stupendous, I hear the wine is great," he said. "You guys can party on, but some of us are going to sit on the sideline like wallflowers."

Cashin said he doesn't think the economy is moving as much as data shows, and he's worried there are billions of dollars in excess reserves from people not borrowing.

"Don't Trust Dow 10,000" (CNNMoney.com)

The stock market is supposed to be a leading indicator, predicting what happens next. But the rally doesn't mean the nation's economic woes are over.

As the Dow closed above 10,000 for the first time in more than a year Wednesday, economists cautioned that the blue-chip average shouldn't be seen as giving a green light to the economy.

The stock market is what is known as a leading economic indicator, as investors place bets on how strong they believe company results and the broader economy will be in the near future.

Lately, there has been a growing consensus among both investors and economists that the battered U.S. economy hit bottom and turned around earlier this year, and is now in a recovery.

"Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet" (Robert Reich's blog)

How did the Dow break 10,000 when the rest of the economy is in the toilet?

1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.

2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.

3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.

Comments

[Wilky:]

" At some point the Fed is going to worry about inflation and a falling dollar."


Please be kind enough to tell us exactly when that will be. :)

Oct 16 07:36 AM

[enigmaman:]

Simply put the economy isnt about Dow 10,000, it isnt about companies and it isnt about stocks, its all about what is and has happened to the people, when you block out all the other noise and you see that the middle class is systematically being destroyed then you see reality, consider what has happened to them over the last ten years, what is happening to them right now and what will happen to the in the future, current Fed policies will only accelerate the process. Wall Street and DC celebrate the return of the market and return of big government, while main street cowers in the corner weaker and more afraid now then ever before. There will be no sustainable recovery and there will be no bright future unless main street believes they still have a chance to succeed and have the support of Wall Street and DC and right now they have neither. Both are right now caught up in the glory of their own success, enjoying the fruits of their labor reminiscent of days gone by when "Nero fiddled as Rome burned"

Oct 16 07:44 AM