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The Dow Jones Industrials average hit 16,000 today. It didn’t stay there for long, it closed at 15,976, but crossing that landmark line was enough to put big smiles on the faces of investors and traders. But what about the rest of us? The economy hasn’t given much cause for celebration to most of us this year, so why are the markets riding so high?
“We have seen a bit of a decoupling between the health of the overall economy and the stock market,” says Alec Young, global equities strategist at S&P Capital IQ.
Young says the stock market is solidly backed up by the profits companies are bringing in. It might sound surprising that companies are making such hefty profits, given that unemployment is high and spending has stayed sluggish this year. “Companies are becoming more and more efficient,” explains Young. “That doesn’t necessarily mean that they need to hire more Americans to do it.”
US companies have gotten leaner and meaner. There’s the lean: “Look at General Motors. They went through bankruptcy court, they downsized dramatically and now they’re making money hand over fist,” says James Angel, professor of finance at Georgetown University. But there’s also the mean: Angel says wages have stayed low along with corporate taxes and borrowing costs.
Sixteen thousand might be a new landmark for the Dow, but everyone should keep that number in perspective. “Part of the reason it’s a record is that we just turned in one of the worst decades in equity performances in American history,” says Max Wolff, chief economist at ZT Wealth. He points out that markets are only up about 10% over the last 5 years. Getting excited about those numbers, says Wolff, means grading on a big curve. “And this isn’t necessarily the kind of curve you always see in the school for the gifted,” he says.
The US economy has only grown about 2% this year.