Stock Market: Dow Hits Dizzying Heights
The Dow Jones Industrial Average (DJIA) surged to hit new records - repeatedly throughout October - surpassing the 12,000 mark for the first time ever in the third week of the month. Analysts and investors alike focused their rapt attention on the Dow’s heartening performance. Few market gurus want to stick their necks out and predict where the market is going, but a look at some key observations may give us a few clues. If this strong rally initially took you by surprise, you’re not alone. The experts have been rolling up their sleeves to try and figure out what’s happened and why. As usual, there’s more than meets the eye.
First, looking at the numbers and statistics, we see that not all component stocks in the Dow are on an up tick. It’s interesting to note that only a third are valued higher now than when the Dow hit its last peak in 2000. The median stock in the Dow is down about 30 percent since the Dow’s earlier record high, and investment analysts have calculated that the total value of the stock market is still more than $1 trillion less than it was in 2000. It’s fair to say we are in the middle of a strong fall rally, but it should be noted that there’s more to the overall investment picture than the performance of the Dow. Some analysts have termed the Dow’s new record an illusion of sorts, and suggested that it’s unwise to become too enthused over a number that truly lacks major significance.
Numbers and rational arguments aside, if we look at investor confidence --a much more nebulous factor - there are strong indications that investors now are in a bullish mood. We’re still getting bad news from the Middle East and some new scares emanating from North Korea, but a decline in oil prices and the Federal Reserve’s decision to halt short-term rate hikes put investors in a buying mood. This exuberance has been sufficient to withstand geopolitical pessimism and a housing slump. Consumer confidence is back - and perhaps it is even more notable in contrast to the bleak pessimism generated last summer. In such a climate, investors are willing to see beyond any bad news from overseas and remain in buying mode. But, it might be high time for some profit taking.
As mentioned earlier, few experts are willing to predict where we stock prices are heading, but more than a few notable commentators are suggesting that the large-cap growth segment is one to watch. Pundits are looking at price-to-earnings growth ratios as the means to identify under-valued stocks (and over-valued equities, too). Compared to small-cap, mid-cap and value stocks, large-cap companies have been out of favor for several years.
Few pundits predicted the current bullish high, but many remind us that the old rules still apply, and urge investors to remember some basic points. If rallies climb "a wall of worry" as traders like to say, then euphoric enthusiasm often indicates a market peak. The Dow has created lots of reasons to celebrate, but this can’t last forever. Now, as always, keep your eye on the fundamentals that underpin the markets.