“Tonight we’re going to party like it’s 1999.”
Prince
There was much celebrating on Oct. 14, when the Dow Jones Industrial Average closed above 10,000. It was the first time the Dow reached that mark since October 2008 and it marked great progress from the 6,547 close on March 9, 2009.
Still, as Dorsey Wright & Associates wrote in an analysis, it’s sobering to recognize that the Dow is right where it was 10 years ago. That’s more than 2,500 days of market openings and closings with a net result of zero growth.
Given the events of the past couple of years, it’s no wonder we’re celebrating! But this is one parade that merits some steady rain, if not a downright downpour.
First, consider why the Dow has rallied. When the market collapsed, there was so much money sitting in cash, it stimulated the market.
How? If your money were fully invested in the market, there would be no potential for new net demand, unless you bought on margin. If you were completely in cash, all of that money would represent new potential demand for equities.
When too much money is on the sidelines, a bottom is reached and demand sends stocks back up. Once the markets start to recover, “momentum investing” takes over. Hence, the 53% increase in value for the Dow.
However, as Daily Finance put it, “Breaking the key psychological level of Dow 10,000 is one thing. Holding onto those gains is quite another.” Without strong fundamentals, the five-digit Dow is unlikely to long.