Is the Dow surging...Or crashing???

[FourScore]

Yahoo's headlines at this moment link to this AMAZING financial story:

http://news.yahoo.com/s/ap/20070420/ap_on_bi_st_ma_re/wall_street

Wall Street bounded higher Friday, hurtling the Dow Jones industrial average to a record close approaching 13,000 as investors celebrated a week of surprisingly strong earnings reports. The major indexes all had their third straight winning week, their longest such streak since October...

...Better-than-expected results allowed stocks to extend their best April rally in four years, and one that pushed the Nasdaq composite index and the Standard & Poor's 500 index to six-year highs...

But then, I found this:

http://goldsilver.com/the_dow_is_crashing.php

On October 4th 2006, the Dow broke its old high of 11,750 set back on January 14th 2000, and from then on all you heard from the financial press was "Dow sets a new, all time, record high"… at least that's all you heard until the correction on February 27th, 2007...

...A 6.9% gain over the entire 7-year period… hasn't anyone heard of inflation? Don't investors know that if their portfolio doesn't outpace inflation they are actually losing ground?

The Dow is actually crashing, but if you have not yet educated yourself on the insidious ravages that inflation can have on your portfolio, you can't see it. This is a blind spot investors must be mindful of, and guard against, if they are to prosper.

Anytime that it looks like everything is going up, stocks, bonds, real estate, commodities, and virtually every kind of investment there is, you have to stop and ask yourself, "why?" The only reason the Dow looks like it is going up is because the Fed has pumped so many more dollars into the currency supply, that all asset classes are rising...

SNIP

...According to the Minneapolis Federal Reserve, total inflation from 2000 to 2007, using the Consumer Price Index, is just about 20%. This means the Dow would have to be at 14,100 just to break even...

I am certainly no economist, so I'm not sure what to make of this. Anyone smarter than me want to comment on it all? (Of course dumb comments are welcome too:D )

[dairydog91]

1. Err...

The DJIA crashed a while ago (Not sure exactly when), though not as much as the NASDAQ. The reason that it has only gained so much as it has is because it had to recover from a large drop. The fact that it's gaining steadily is a good thing. Also, the DJIA is just a synthesis of a few companies' results. It's an overall measure, a "finger in the water" if you will. It's quite possible to invest in companies that gain value much more quickly than the DJIA.

Keep in mind that the author of that article wants to encourage you to buy gold/silver instead of stock. I only keep a few thousand in the stock market, mainly in bluechips, and I've certainly made money after adjusting for inflation.

[FourScore]

2. Hi dairydog91!

Welcome to DU!:hi:

Like I said, I am no economist. Care to elaborate?

[dairydog91]

4. Elaborate on what?

Sorry, I'm editing my last post a bit more. The main reason that the Dow has only gained that much from its 2000 level is that it crashed shortly after the record. Hence, it has not only gained value to its current high, it had to recoup all the value it lost.

The crash, according to about.com, occurred when the DJIA equaled 11,792.98, and the Dow consequently fell to 7,286.27. Hence, a gain to 13,000 could be more accurately seen as a growth of 78% from the bottom point of the crash.

[FourScore]

8. True. But the point that the author is making

is that in increase is not as great as it appears when adjusted for inflation.

[FourScore]

5. Good point that the author

wants to sell gold/silver. Thanks for the clarification with the edit you did.

[hughee99]

3. If this is how a surge is supposed to look...

then things are right on track with the one in Iraq.

[FourScore]

6. LOL

:rofl:

[ThomWV]

7. So ... is it better then to keep your dollars in your pocket?

[gravity]

17. It's never better to keep dollars in your pocket

Inflation will always eat it away.

If you want to have a no risk investment, then invest in bonds and you will have modest gains. Historically speaking though, the stock market has always produced much higher yields in the long term. The problem is that if you want big gains, you have to take some risk.

[MadHound]

9. It is building a bubble again

With little reasonable grounding in the financial realities supporting it. The cynical part of me is thinking that it is a deliberate pump and dump scheme cooking here, but hey, I'm a cynical bastard.

My thought is that once again the Fed and the market is trying to put off a serious recession or depression. Back in the late ninties, early '00s when it was obvious that the markets were going to crash, Greenspan lowered the interest rates in a frenzy. Thus the smart investment money dropped into the real estate market, prompting that bubble to build, and forestalling the worst of the recession. Now that the real estate and housing bubble is bursting, the smart money is going back into the markets. The trouble is that there is no true backing for this market. High debt, high deficit, high energy prices, creeping inflation, and down housing market, a weak dollar, frankly all that is holding this market up is a lot of hot air. So it will continue to swell and swell until reality pokes a huge hole in it, and the worst effects of that recession that was put off in the late ninties, early '00s, will come back to bite us, with eight years of serious interest.

That's my take, your mileage may vary.

[Straight Shooter]

10. "... the real estate and housing bubble is bursting, the smart money is going back into the markets"

I think that's a very plausible explanation. :thumbsup:

[Igel]

11. There's a wrinkle in comparing stock prices like that.

You have to factor in (a) changes to the composition of the DJI, and (b) any stock splits that's occurred since 2000 by companies in the DJI.

[JackRiddler]

14. Changes in the DJI...

That's one reason why, market up or down, the whole process has a scam quality. Underperformers get shuffled out, performers get added. Yet we still compare it to the DJI of a century ago.

[HughMoran]

16. Seems valid to me.

Don't you think changes in composition and splits are factored into the calculation? It would seem to me that those factors would cause a sudden change in the average - doesn't happen that way.

Anyway, 6.9% increase in the Dow in 7 years is abominable performance, no matter how you look at it. I've barely made back all that was lost when the market went to crap during the early part of Bushco. A "record high" is meaningless if the market dipped for 6 years between peaks - this is just silly using this term in a time like this.

[gravity]

18. The dow is weighted to compensate for changes in composition

The record high 7 years ago was a BUBBLE, and it burst afterwards. The stock prices back then did not reflect the real value of the companies, but speculation of future gains.

Since the burst however, the stock market has been making steady gains.

[HughMoran]

19. You mean since 1/2006?

The bubble took a long time to recover as the market was flat from since Bush took office in 1/2001 to 1/2006. It has only recently started any sort of steady climb.

Why are you so intent on showing the market as stronger than it has been?

My account value and gains for the past 6 years (including 401k which I play no part in managing) have not been much higher than the inflation rate until just recently.

Are you saying the bubble took 6 years to "burst"?

[gravity]

21. The dow stopped declining in 2003

Since then it has been in an uptrend. The Dow had more than a 50% gain since 2003.

[HughMoran]

22. lol

you are discounting a lot, but I can't prevent you from interpreting things in the most positive possible way.

Good luck.

[gravity]

23. Well thats the truth

My point is to stop measuring everything based on what you had in the past. The only thing that matters is what you have now, and what you are going to have in the future.

[HughMoran]

24. Psychology is fun

Yes, I am going ahead and making money now, but I CANNOT discount how much money I lost in the past - my account is referenced to the 1980's. Gains referenced only to an upturn in the market does not in itself increase the long-term value of my account. The goal is to make money, not gloat over short-term gains.

I'm not sure where you are coming from or why you are promoting a philosophy this way, but in the bigger picture, when looked at with all political implications considered (this is a political site after all), there are different ways to look at this that are also "the truth". It all depends on what the reference point is - some of us choose to put a stake in the ground when Bush took office. This is the perspective of many on a political board - you seem to be trying to ignore this obvious reality.

[gravity]

25. People lose money trying to break even

The problem is when people are to concerned about what they had in the past, they don't cut their loses when there is evidence that the market is going to decline even further. They are mad at what the stock could have been, so instead of admitting their mistakes and getting out, they hold on to a losing bet like a compulsive gambler going further into debt. Thats why it's more important to focus on what the market is going to be doing in the future instead of obsessing about the past.

Bush could be part of the reason for the declines in the stock market, but the main reason was that the stock market was in a bubble. Even if Gore was elected in 2000, there still would have been a drop in the Dow and conservatives would have blamed it on Democrats. It might have not been as much of a dip, but it still would have declined.

If you could have predicted that Bush would hurt the stock market, the smart thing to do would be to get out of the market, regardless of what you had already lost in the past. You can gain it back when the market is going strong again.

[Rydz777]

12. Current headline

"Dollar falls to 26-year low against the pound." The dollar is sinking fast, and so it may make sense to put your dollars in the stock market instead of in a mattress.

[MrMickeysMom]

13. I would only have dumb comments...

But, it follows common sense in my simple reasoning that when you print more money, it's worth less. Our treasury prints more money. Bond holders on some of the most significant real estate seems to be going off shore. We, on the whole, have NEGATIVE savings.

This = some effin doom in my future crystal ball.

[FourScore]

27. Hi MrMickeysMom!

Welcome to DU!:hi:

"I would only have dumb comments..."

Sometimes it's "the dumb" comments that reflect the most common sense!

[gravity]

15. The stock market was overvalued in 2000

The GDP however has been increasing since that time which is the real measure of how the economy is doing.

Comparing the stock market to 2000 is not the best way to guage the performance of your portfolio. Shorter term investments, like since 2003, have been going well and the trend is continuing in that direction. The real focus should be obtaining future gains, since you can't change what happened in the past. If the stock market is increasing 10% a year NOW, then things are going well.

[rucky]

20. inflation affects everything with a $ the same way

so isn't it spurious to just talk about how if affects the Dow?

[Clarkie1]

26. It's been a bull market since March 2003, and I'm happy to be in it. nt