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.
The best investor in the United States basically ignores Wall Street. Warren Buffett has billions he could trade in and out of stocks. Thousands of analysts would clamor to give him hot tips. But Buffett ignores it all. Serene, he sits in his office, reading annual reports, newspapers, and thinking about opportunities for growth. He isn't drinking champagne tonight. And you shouldn't be either.
We are far from out of the woods. Large companies are still laying off employees. When we cross the 10% unemployment line, consumer spending (now down to 70% of GDP) may contract even further. It probably should. Consumer spending in the UK is 65% and in China it's only 40%.
Haven't we learned something from this crisis?? Wall Street sold the world worthless securities, trillions of dollars of wealth evaporated, and now Wall Street is cheering this "new" bull market. Now the bulls say it's all okay again?!
What you're watching now is a bull market on government spending. What you should be watching is the real report card:
- Inflation: There is $50T in unfunded liabilities on the country's balance sheet. If the USA played by corporate America's accounting rules, we'd be bankrupt. The laws of gravity still apply. We will experience significant inflation within 3 years.
- Job Growth: Since the start of the recession in December 2007, we've lost 7.6 million jobs. Millions more have stopped looking for work. The analysts keep saying this downward trend will stop. But it hasn't.
- Innovation: The credit contraction makes it harder for entrepreneurs and small businesses to invest in growth. This segment of the economy is where a rebound will start. Don't watch the Dow, watch small business credit (contracting) and patents filed (contracting).
- Education: The important word in "Gross Domestic Product" is product. We must have highly skilled knowledge workers to compete against other economic innovators. A third of high school students aren't graduating.
