What´s so special about 13000?

From all the hoopla you would guess “a lot”. From the WSJ:

After bouncing up and down around the 13000 level for a week, the Dow Jones Industrial Average finally closed above that psychologically important mark for the first time since May 2008.

As last summer’s fears of a U.S. recession and a European debt collapse have gradually waned, the Dow has staged a 22% rebound since early October, and its 6.4% gain for 2012 marks the strongest beginning to a year since 1998.

Stock indexes rose but gave up earlier gains after a morning of choppy trading that followed mixed economic data. Still, the Dow ended up closing above 13000. Jonathan Cheng reports on the News Hub.

With stocks up so far in such a short time, money managers find themselves torn between concerns the market is overdue for some kind of pullback and fears the market’s strength could leave them regretting any decision to get out now.

But take a closer look. Believe me when I say that in July 1965 the Dow was around 800 points. 17 years later, in July 1982 it was at the same 800 points.

In the following 17 years to July 1999 it went up by 10600 points. But for the last 13 years it has just “bounced” along a 5000 point interval.

Funny that just about the time the NASDAQ was in full swing, the Dow “capped”. Could it be that in mid 1982, just as inflation was being “trounced” and the door through to the “Great Moderation” was about to be crossed, the Dow began to “price in” a more lucrative future and 17 years later it began to “scent” unpleasant “smells”?

At the time, Y2K was “in the cards”. Maybe the market “smelled” the balance sheet “shenanigans” that would be “unveiled” a couple of years later (and that had begun in 1997). Maybe it “figured” that having managed to obtain a fiscal surplus for the first time in many decades, the government would soon itch to “undo it” (and then some). Maybe the market “felt” that the economy was “overheating” and that the Fed would come down “hard”. Coincidentally, it “capped” just as the Fed began to raise rates in mid 1999 (rates went from 4.75% in June 99 to 6.5% in June 00). Certainly 9/11 was not “factored in”, nor was the Bush Jr. “penchant” for going to war. And most certainly it did not “contemplate” the big drop in NGDP that would take place 9 years later (for the first time since 1938) under Bernanke who at the time was “just” a university professor.

So 13000 is just the “top” of a log running range. And that´s why investors feel the proverbial “chill in the spine”. As I mentioned a couple of days ago with reference to the S&P, “this stock market rally is not for real”. It´s just riding a “foamy wave of sentiment”. That´s been mostly true for the past 13 years. The “novelty” is that now the market´s “conduit” has been, believe it or not, inflation expectations. A hell of a “way to go”!

5 thoughts on “What´s so special about 13000?

  1. Interesting. I think if the Fed adopted NGDP targeting, we would see 18,000 on the Dow within five years.

    I wonder if the ass-bite tight money crowd knows that.

  2. Little wonder the Nikkei 225 is up 15% YTD! Shirakawa’s imminent departure is making things interesting there.

  3. I must say Marcus, that here I think you are very much taking the glass half empty arguments a little too far. No doubt that adjusting for inflation we have seen the market spin it’s wheels since 1999. However you can’t judge the current market and economy simply against the high points of 1999 and declare there is no recovery right now.

    The relevant comparison is how the market has performed since it’s bottom in March 2009. What’s interesting is that the Nasdaq has come fully back from the bear market that started in late 2007 and ended in March 2009. Not only has it come back but it has even gone beyond to take back some of the losses of the previous bear market of 2000-2002. It;s now at levels not seen since 2000.

    I’m not wholly clear how monetary policy is supposed to have changed so much starting in 1999. The same inflation first agenda continued and the vaunted age of the Great Moderation continued. You could argue it still goes on as we have less inflation now than ever. Which proves there is more to life than low inflation.

  4. The bottom was in March 09 because that´s when QE1 came on! There were several negative shocks in the late 90s and early 00s. Some were exogenous (9/11), some were “man made” (the balance sheet shenanigans) and others were “policy-driven (Bush Budget and Wars). So the economy became much less “agreable” in the 00s. Bernanke just “topped it off” by letting NGDP take a plunge. Am I´m willing to wager that if monetary policy remains on the “side lines” in 6 months time the DOW will not be higher than 13000!

  5. Thanks for the reply Marucs-better late than never-LOL. Part of our currently half empty glass is due to the EU mess. I got to hope your pessimistic prediction is wrong but time will tell.

    If it depends on either monetary or fiscal easing in the short term it doesn’t look so hopeful. The Fed-if it stays true to form-will act only if things get much worse-ie, the EU is a contagion. They’ll fight deflation but that’s all.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.