Wednesday, March 6, 2013

Dow Hits Record High: Here's Why It Doesn't Matter

Mar 5, 2013

The best-known stock-market average in the world is at an all-time high. Unfortunately, that matters less than it ever has.

A new high for the Dow Jones Industrial Average is an important milestone on the road to recovery, no doubt. The stock index has more than doubled from its low in March 2009, making this one of the strongest bull markets in history. At the same time, regular people have hardly benefited.

[This is all that I'm interested in - that the economic recovery has meant little increase in wages for the ordinary working class.]

The Dow Jones Industrial Average was up about 130 points to about 14,250 on Tuesday morning, on track to break its previous high close of 14,164.53 set on Oct. 9, 2007. After more than five years, at least one stock-market index has finally erased the memory of the financial crisis and Great Recession.

Other, broader market measures still have a ways to go. The Standard & Poor's 500-stock index was still about 30 points away from its record high of 1565.15, also set on Oct. 9, 2007. And the tech-stock-heavy Nasdaq Composite Index was at about 3215, still light years away from its record high of 5048.62, set on March 10, 2000, back in its dot-com glory days.

Those indices are better indicators of the stock market as a whole. Though the Dow is better known, and claims "to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy," it has some big flaws.

It is made up of just 30 stocks, for one thing, meaning some very important companies get left out, and other, less-important companies get undue influence. And it's bizarrely weighted by stock price, regardless of how big or important a company is.

That means a company like Travelers, with a stock price of about $80 and a market value of about $30 billion, has more weight in the index than Microsoft, which has a stock price of about $28 and a market value of $233 billion. Is Travelers more important than Microsoft to the economy? Are either more important than Google or Apple, neither of which are in the Dow?

And neither Google nor Apple can ever be added to the Dow, because their stock prices ($800 and $450, respectively) are so huge that they would unfairly influence the price-weighted index. You also can definitely forget ever adding Warren Buffett's Berkshire Hathaway, which is a far more important and influential company than Travelers, but has a Dow-wrecking stock price of $153,360.

The Wall Street Journal's editors, my former employers, do the best they can picking stocks for the Dow within these bizarre parameters, but there's only so much they can do. The index's flaws mean it is far from a good proxy for the economy.

And even if the Dow were a better index -- if it were more like the S&P 500, say -- the stock market generally has been disconnected from the broader economy for quite a while.

Nothing illustrates this quite as well as the yawning gap between the job market's recovery and the stock market's recovery. The Dow has recovered all of its recession losses, gaining 115 percent from its low in March 2009. That makes this the third-strongest bull market for the Dow since World War II. In contrast, the job market is still in a deep hole, recovering only 5.5 million of the 8.7 million jobs lost during the recession.

In other words, the third-best stock-market rebound since World War II has been accompanied by the worst labor-market recovery since World War II.

With the job market weak, worker wages have stagnated. Inflation-adjusted average income is 8 percent lower than in 2007, when the Dow was at its previous high, notes Quartz's Matt Phillips. Nothing illustrates the disconnect between regular people and the stock market than the chart above, showing how profits and stocks have skyrocketed together, leaving hourly earnings in the dust.

Higher stock prices do benefit the wealthy and wage-earners who own stock in their retirement plans. That could bolster the mood of consumers, which could benefit the economy. But after two stock-market crashes in the past 13 years and technological glitches like the Flash Crash of 2010 and the botched Facebook IPO, investors could be skeptical that the good times will last. That makes them less likely to run out and spend a bunch of money at the first sign of a stock-market high. If they have any extra money to spend, that is.

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