Dow 36,000 … (correction 16,000)

Posted by Mark Jasayko, CFA, Portfolio Manager

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McIver Wealth Management Consulting Group / Richardson GMP Limited
Five Year Chart of the Dow Industrials

The Dow reached 16,000 for the first time this morning.

That got me thinking about the book titled Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market which was published in the year 2000. 13 years later and only 20,000 points short!

The news of “Dow 16,000” appears to be celebrated a little more than previous milestones since it coincides with the S&P 500 hitting 1,800 for the first time on the same morning.

With all the celebrating and headline frenzy, there has not been much chatter all with respect to what has driven the Dow to this new high. Almost all of the gains over the past two years have been the result of easy monetary policy. Corporate non-financial earnings have essentially been flat over this time, and financial earnings have been largely subsidized by the U.S. Federal Reserve paying interest (which it never did until a couple of years ago) on the $3 trillion of commercial bank excess reserves held on deposit at the Fed.

“Dow 16,000” should serve as a reminder to us to ask when earnings growth is coming. Will an economy that is more sluggish that the Fed and private economists expected be able to produce more earnings? Can companies cut even more costs (and employees) to squeeze out more earnings in order to justify their share prices?

At “Dow 16,000” these questions carry more weight than at “Dow 15,000” and “Dow 14,000” etc. If earnings don’t materialize, then maybe more Quantitative Easing will be required. Bulls might be happy to know that the next Fed Chairman Janet Yellen won’t have many qualms about doing this regardless of the long-term costs and ramifications.

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