The stock market’s benchmark Dow Jones Industrial Average is creeping back toward the 10,000-point level, less than a year after an economic meltdown drove the closely watched index to a six-year low of 7,552. Cheers and party hats greeted the Dow’s first rise into five-digit territory a decade ago, but what does it mean this time around? Finance professor David Ikenberry, a stock market expert, and Institute of Government and Public Affairs economist Daniel McMillen discuss the approaching milestone in interviews with News Bureau Business & Law Editor Jan Dennis.
Would topping the 10,000-point mark on the Dow have any tangible meaning for the economy and investors, or is the milestone just symbolic?
Finance professor and stock market expert David Ikenberry
David Ikenberry
As human beings, we are often drawn to round numbers relating to various milestones in life or in society. With football coaches, it resonates with passing milestones measured in hundreds of career wins. For coaches in basketball and baseball, the milestones may be measured in thousands. We do the same thing with important birthdates as we age – 30 seems to be the first mile marker we pay attention to, followed by 40, 50, 60, etc. Each of these milestones is nothing more than that, an arbitrary line which when crossed often encourages us, unlike other species, to reflect on where we’ve been, what we may have accomplished and perhaps what’s in store.
For the Dow Jones Index, the next relevant marker is often denominated by 1,000s and, of course, 10,000 has even more of a ring to it. We are coming up on that now. Frankly, that particular level does not have much economic impact or bearing. We do know that as we reach these milestones, investors do seem to anticipate them – trading activity may be elevated as investors, aware of a pending milestone, may trade around the event causing trading volumes to elevate. At the individual stock level, we do see some gravitation to round prices marked in even dollars or half-dollars per share – 12, 12.50, 13, 13.50. As humans, we seem attracted to these numbers. These milestones can create either barriers from above or floors from below. A recent study by my colleagues Allen Poteshman and Neil Pearson found that trading in options also gets muddied when stock prices cross key price points.
Yet while there may be some near-term impact, the broader implications for the Dow crossing a key threshold is not so clear. While the past is well understood, other mile markers, say age for example, do portend the future.
The onslaught of 60 today often means the beginning a number of life changes. Yet for the Dow, no such change is really evident. The number, by its construction, does not shed too much light on its future investment worth or its relative safety. As investors, we really are concerned about tomorrow – we cannot purchase yesterday’s performance.
Notwithstanding the attention we extend these markers and perhaps some near-term market effects, a specific level of 10,000 is of no more economic consequence than of the index crossing say any other arbitrary level, say 9,626.80, its value as we speak right now.
Institute of Government and Public Affairs economist Daniel McMillen
Daniel McMillen
Last fall, many economists and financial planners were seriously concerned that the economy was about to collapse. Although there currently is debate over whether the recession is over, it is clear that there are strong signs of recovery. A 10,000-point Dow is one of those signals. The 10,000-point mark has no real significance – it is a lot better than the 6,547 point low in March and a lot worse than the 14,165 high of two years ago – but it certainly is a good sign. It shows that many investors have regained confidence in the economy.
Most observers now believe that the sharp decline in the economy is over. House sales and housing starts have begun to increase again. New claims for unemployment have decreased. And, in a bit of circular reasoning, prices of stocks have been rising again. The problem is that it takes a long time to recover from a severe recession, and this recession has been the worse since the Great Depression. One group of relatively optimistic investors has been buying stocks; another pessimistic group will view the 10,000-point mark as unsustainable. It seems likely that the Dow will quickly fall back below 10,000 before enough people are confident of a recovery that it stays above the threshold for an extended time.
Long recessions are followed by long recoveries. The rise in the Dow is a very good sign. But the recession will technically have been over for quite some time before people feel like it’s over.
