Explaining the record high reached by the Dow Jones Industrial Average on Tuesday is straightforward. Falling oil prices have reduced inflation fears, leading to the the hope that the Fed, worried about the declining housing market, will cut interest rates before the year is over. Lowering the cost of borrowing -- cheap money! -- makes investors happy. Thus the surge.
But a couple of my regular economic commentators are suggesting this morning, for quite different reasons, that maybe we should pay a little less attention to the Dow's peaks and valleys. At the Capital Spectator, James Picerno declares the Dow is "irrelevant." It measures (badly) just 30 stocks. Other stock market indexes, NASDAQ, the Russell 5000, the S&P 500, aren't close to their all-time highs.
"The modern Dow Industrials is the world's most recognized stock index, but the benchmark exists by virtue of its lengthy history as opposed to any compelling relevance. Looking at the Dow is like peering back into time. This, dear readers, is an index that is bottled in a methodological formaldehyde, preserved for the ages for no particular reason beyond the fact that it's been around longer than its competitors."
Over at Beat the Press, Dean Baker has a bit of a harsher take, bridling at what he calls the "class bias" evident in the cheerleading of the financial press for the Dow's exploits (though he provides no links to said cheerleading, which is a blogger no-no).
"In principle, the stock market represents the discounted value of the future profits of corporate America. If the value rises because the economy can now be seen as growing more rapidly, then this is certainly good news. But, if future profits are projected to be higher because of lower wages or lower corporate taxes (e.g. a higher tax burden on workers or fewer public services), why should the mass of the population, who own little or no stock, celebrate?"
Good question -- especially when most indicators suggest that the economy is actually slowing. In fact, one theory for why oil prices are declining so rapidly is that speculators are selling off their holdings precisely because they fear an economic slowdown next year will depress worldwide energy demand.
Which brings us back to square one. If it is true that the Dow's recent vim and vigor is a result of falling oil prices, then what investors are actually celebrating is the likelihood of an oncoming recession. Woo hoo!
Shares