The Truth Behind the Dow's All-Time Highs

I have a secret to tell you about the new all-time highs the Dow recorded this week.

It’s not about an impending market crash. It’s not about panic or a disconnected economy, or any of the other themes the media has bombarded you with this week.

No, the secret I want to share with you is simple. Yet it has been almost completely overlooked since the Dow Jones Industrial Average posted fresh highs.

The truth about these new highs is that they don’t matter – at least not the way you think they do.

It is all too easy to look at this week’s market milestones through the lens of crisis. Folks want to know why the markets are rising while the economy feels stagnant. Jobs and income aren’t back to levels we saw before everything got out of control. Europe is a mess. Need I go on?

Investors continue to replay the financial crisis carnage. And they expect the markets to do the same. Their wallets and psyche remain damaged. They do not trust the stock market anymore-and many of these same investors have fled to bonds. They have yet to participate in the cyclical bull that emerged in 2009…

Of course, the stories surrounding the newest Dow milestone reflect this mood.

One of my favourite comparisons is these new highs signal that the Dow is heading for a crash that will mirror the 1987 panic. If this is true, the market will need to punch it into overdrive, considering that the year-over-year gains the overheated Dow posted at its 1987 high were a whopping 44%.

 

Looking back to more recent market tops, it is important keep in mind just how different the sentiment picture is today than it was in 2000 or 2007. During the dot-com boom, consistent moves higher were never questioned.

Stocks could not possibly lose value. Even smack in the middle of a secular bear market, the 2007 highs were also met with little scrutiny from the mainstream press. Americans-flush with cash from an unprecedented housing boom-had yet to feel the pinch of a sharp recession. Most investors were in a position to take risk.

That’s a very different sentiment picture than we’re experiencing today…

Remember, new highs aren’t market tops. In fact, hundreds of highs registered during the bull markets of the 50’s, 60’s, 80’s and 90’s. Tops are only visible with the aid of hindsight. Once the market slogs through the final legs of the lost decade, the idea of constantly announcing new highs will quietly disappear.

Regards,

Greg Guenthner
for Markets and Money

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Greg Guenthner

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