10,000 Mania

Well, that was fun.

At 9:51 a.m., the Dow did break that vaunted 10,000 mark, and for about 30 seconds traders tossed white pieces of paper in the air and CNBC’s Maria Bartiromo smiled widely. Then the index headed downward and spent the rest of the day meandering around the unchanged mark. It was, in other words, a celebration worthy of the achievement.

There’s probably something interesting to be said about our broader cultural affection for milestones, but in this case the hullabaloo about Dow 10,000 seems both forced and singularly irrelevant. To take only the most obvious point, the Dow Jones Industrial Average is increasingly unrepresentative of corporate America. Sixty years ago, when half of America’s manufacturing assets were owned by the largest 100 companies, an index of 30 companies had a plausible claim to representativeness. But that’s hardly the case today, although no one should underestimate just how big the biggest U.S. companies remain. And obviously the absence of companies like Microsoft, Intel, and MCI/WorldCom from the index means that the fastest-growing sectors of the economy are underrepresented by the Dow.

But of course everyone knows that, which speaks to the odd position that the Dow occupies in the popular imagination. You have this index that’s taken as a proxy for the stock market as a whole, even though it doesn’t tell you anything about what most stocks are doing and tells you very little about what even large-cap stocks are doing, and that’s also taken as a proxy for the economy, even though it tells you even less about that. In that sense, the Dow is probably best seen as a general indicator of investors’ moods, rather than anything like a true indicator of future corporate earnings or economic trends.

The other thing about Dow 10,000 is even more obvious, which is that the higher you get, the less impressive each added 1,000 points become. In 1971, there was considerable attentionf focused on when the Dow would break 1,000. In 28 years, the Dow has increased in value 10 times (assuming, for simplicity’s sake, that the stocks in the index had stayed the same). So by now, 1,000-point annual moves should be seen as almost routine. Given the current low-interest-rate, low-inflation environment, with corporate earnings coming in slightly ahead of expectations, a 10 percent annual rise in the major indices doesn’t seem unlikely. (Though for investors who have gotten used to 25 percent bumps it’s going to seem like a slowdown.) So Dow 11,000 could easily arrive within a year. It’s a strange concept, actually. It took almost 70 years for the Dow to rise that first 1,000 points. Now it’ll be a matter of 12 months or so.

Of course, that assumes that we can stay at these levels, and looking back to 1971 does provide a couple of cautionary notes. In the first place, one might ask whether corporate America is really ten times as strong as it was in 1971. But actually I think the answer to that question might very well be yes, when you consider inflation, the oil crisis, profit stagnation, strong labor unions, and the fact that half of the world’s economy was effectively closed for business. The second caution, though, is a bit more troubling, which is that in 1973-1974, just a year and a half after people were looking to Dow 1,000, the market lost almost half its value. There is nothing like 1973-1974 on the horizon. But it’s still worth remembering that investors in 1971 were just as sure that stocks would always go up, and that you should pay any price for growth. We’re never as smart as we think we are.