I do not trumpet rises in the DJIA. I do not rend my garments over its declines. I think the relationship between the DJIA and the economy that I encounter every time I go to the grocery store, pump gas, pay my bills, or go to work is only tangential at this point—the DJIA has a life of its own and I have little to do with it.
In 1980 the DJIA stood at 824 and had been around that for more than 15 years. Now it’s at 25,000. The number of people who are employed hasn’t increased 30 fold, my house isn’t worth 30 times what it was worth then, and I’m not getting paid 30 times what I was in 1980. If I were I’d be in the top .1% of income earners.
In 1980 a 100 point decline in the DJIA would be catastrophic. Now a 1,000 point decline is merely nerve-wracking.
Update
Jeff Spross expresses somewhat similar ideas at The Week:
The stock market giveth, and the stock market taketh away.
After a year of booming valuations and record-smashing highs, the stock market has been tumbling for days. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq all weakened last week, and then nosedived on Friday, with the Dow plummeting more than 660 points. It was the Dow’s worst day since the summer of 2016. It seemed like things couldn’t get much worse.
Then Monday rolled around, and stocks went into a catastrophic slide. The Dow absolutely tanked, diving 1,175 points for the day. At one point it was down more than 1,500 points, and somehow plunged 800 points in roughly 15 minutes before righting itself. By day’s end, all the gains of this new year had been erased. It was the Dow’s worst day in more than six years.
The January jobs report was positive on its face. Unemployment remains low. Nothing major seems to have changed in the last few days.
So what on Earth is going on?
I think that’s a healthy attitude. It is also very close to technically accurate. The question to be asked is what factors in the real economy are being reflected in the price of public equities. Specifically, output growth, employment and wage growth appear to remain sound. Event risk does not seem a likely cause.
Higher rates appear to be a likely culprit, for reasons well covered previously. But there will be speculation about simple correction from over-valuation, portfolio rebalancing, profit taking and any number of politically motivated citations.
The bottom line is that prediction is hard, especially about the future, and ones portfolio should have been constructed to deal with this a long time ago.
Meh. The market does not necessarily reflect a strong economy. I thought we all knew that. It has its own rules and concerns, and is sometimes irrational (sorry Drew). Probably worried about rates going up and over valuation would be my guess. Maybe inflation? Wouldn’t be too worried. OTOH, it is kind of fun to see the non-bragadocious Trump try to not take credit for this after taking credit for the market going up.
Steve
Indexes such as the dow jones or S&P 500 are misleading; they are effected by “survivor bias”, i.e. they replace companies that are doing poorly / died with ones that grow.
For a good example, how many stocks in the Dow 30 from 1982 are still in the Dow today? 7 – American Express, Du Pont, Exxon, GE, IBM, P&G, United Technologies. The other 23 had some that went bankrupt – including Kodak, Bethlehem Steel, GM, Woolworths. An investor who followed that Dow would have sold declining stocks well before they became bankrupt.
Since the economy comprise both the winners and losers, while the indexes track only the winners, indexes should grow faster than the economy.
Its also why its very hard for stock pickers to beat the indexes for a sustained period.
The FAANG stocks present a problem that S&P hasn’t come to terms with yet. They make up far too high a proportion of the index:
It’s really not clear what the S&P 500 represents any more.