Why the Dow doesn't deserve to hit 17,000

The bull market in stocks is running for all the wrong reasons.

By MSN Money Partner Jun 10, 2014 12:15PM
By David Weidner, MarketWatch

We're straddling 17,000 on the Dow Jones Industrial Average ($INDU). But it just doesn't feel right. It has to be the most unenthusiastic rally in a generation -- maybe more.

It's not that there isn't reason to be buying stocks. We are now five years into an economic recovery that began in mid-2009, according to the National Bureau of Economic Research. It's been a slow slog. It's been paced. Those are actually good reasons to be buying stocks. A rapidly growing economy, which coincided with the dot-com boom and the housing bubbles, usually go belly up as quickly as they rise.

And the stock market always leads the economy. Investors tend to buy cheap and ride the wave of ever-increasing earnings and premiums added to their holdings.

But a 155 percent rise in the Dow since the 2009 nadir of the financial crisis? A 31 percent rise in the past 18 months? Yes, the gains look that more striking because of the lows we hit in the Great Recession. Still, that's a fantastic run considering that last week we finally recovered the jobs lost since the financial and housing crises hit. At that point the Dow was 18 percent lower than it is today.

There are many reasons this rally feels empty. But here are the biggest, most obvious reasons:

No one is really buying. 

Stock prices are edging higher, but it's not retail investors driving the trend. Lipper reported that investors last week actually pulled $921 million from U.S. stock mutual funds in the week ended June 4, and $451 million the previous week.

This is a long-term trend. Overall stock holdings -- any type of ownership, including individual stocks -- by households topped out at 67 percent in 2002, according to an ongoing Gallup poll, but has been erratic since. By 2011, that number fell to 54 percent. 

study by the Pew Research Center, published in May, found stock ownership has become even less pervasive, just 45 percent. And while it's true many investors are simply bypassing actively managed funds for cheaper exchange traded funds, the truth is there's not enough of them to really move the needle. It's the wealthiest Americans -- 5 percent of Americans own 82 percent of directly owned, publicly traded stocks, according to the Federal Reserve -- and the pro traders, many of them guided by algorithms.

Corporate earnings are flat. 

You'd think that as the market reaches this milestone, corporate profits would be churning, or a least growing. They aren't.Caption: A trader works on the floor of the New York Stock Exchange
Credit: © Peter Foley/Corbis

The Bureau of Economic Analysis reports that its measure of corporate profits declined 9.8 percent in the first quarter. It was the largest drop since the fourth quarter of 2008, and during the past four quarters, corporate profits have fallen 3 percent.

Market analyst and adviser Doug Short noted last week that the market is overvalued in the range of 51 percent to 85 percent when measured by price-to-earnings ratios and the lesser known Q ratio (total price of the market divided by replacement cost). Also last week, Goldman Sachs analysts published a report that concluded: "In just one quarter, profit margins dropped from 10 percent to 8.7 percent of" gross national product.

There are no alternative investments. 

Rather than higher prices for goods and services and a devalued currency, the real consequence of the Federal Reserve's efforts to stimulate the economy through lower interest rates, bond buying and easy credit seems to be inflation in the stock market.

That's not entirely surprising. Lower interest rates make fixed-income products undesirable. If the 10-year Treasury is close to 2.5 percent (about the same yield it offered last year) and the inflation rate is 2 percent, that’s not a terribly attractive investment. Nor are corporate bonds, which are taxable.

No wonder the Fed is now worried about money pouring into high-yield, or "junk," bonds. Issuance of low-rated U.S. dollar-denominated junk bonds last year hit a record $366 billion, more than twice the level reached in the years before the 2008 financial crisis, according to financial-data provider Dealogic.

As for some other investments: Housing continues to be a game open to cash-rich buyers (31 percent of sales were all-cash in the first quarter); gold at roughly $1,250 an ounce is off 30 percent from its three-year high; and oil has added 20 percent in the past year. Nice, but still trailing the stock market.

Ultimately, today's bull market seems to be driven by a lack of alternatives. What it lacks in enthusiasm it is making up for in gains, as Short's market valuation analysis shows. It's not a bad thing that there’s confidence. On the flip side, markets cannot sustain such overvaluation without a significant change in the economy. And economic growth rates -- GDP contracted at a 1 percent annual rate in the first quarter -- don't support the buying.

That means when something puts a spook into the market, we're going to get burned, our 401k statements are going to be printed in red ink. Remember, your monthly contributions buy stocks at the current levels. We're going to fall hard.

We may not be feeling the rally is real now, but when it disappears, believe me, we're going to feel it.

More from MarketWatch

Jun 10, 2014 1:08PM
If money managers can't convince people to buy stocks then they will try and convince them to sell. No movement at all means no commisions.
Jun 10, 2014 1:15PM
In previous bull runs, when people moved to cash, they used it to buy houses, cars, boats, etc... This time, when they move to cash, they aren't doing anything with it.
Jun 10, 2014 1:53PM
Never should have hit 16,000. The only reason is lots of cheap fake money.
Jun 10, 2014 2:00PM
"But a 155 percent rise in the Dow since the 2009 nadir of the financial crisis? A 31 percent rise in the past 18 months?"

What's not talked about, the Rise before this Current Mother of all Bull Markets was also built on a Phoney Foundation.  We have just added to it. Funny how so many folks refuse to talk about that. So when so folks say well, the current Bull run isn't impressive based on where the Markets had fallen back during the Great Recession, they better take those facts into account also.

We just keep piling on the DEBT, never actually solving a darn thing but certainly creating bigger and bigger Bubbles. Meanwhile America's infrastructure is Falling apart and we have Record Global Poverty. But hey, I got mine so that's all that matters right?
Jun 10, 2014 1:43PM
Right on time.   Publish doomer articles after 3 days of advances.  Standard msn.com/MW policy.
Jun 10, 2014 3:32PM
the reason it doesn't deserve to hit 17000...it didn't deserve to hit 14000
Jun 10, 2014 1:51PM
The real savings paradox is that those who should save (the poor) tend not too and those who should spend (the rich) have been holding more cash. When money is not being used (or worse in a mattress) there is no economic activity generated from that money.
Jun 10, 2014 3:17PM

Stimulus spending in the form of budget deficit, low overnight interest rates and QE has had an impact on stock prices by forcing the market to price in expected inflation. The impact to economic growth and job creation has not materialized. There is a limit to demand side economics.

Jun 10, 2014 5:22PM
Maybe the feds should stop printing up 85 billion a month out of thin air and putting it in the market.
Then we'd see what the market really looks like.

Jun 10, 2014 4:00PM
At the heart of this is the fact that no one is purchasing products because no one can afford them.  You can only buy low and sell high as a disguising tactic for corporate profits for so long. 
Jun 10, 2014 3:38PM
MONOPOLY $$$$$$$$$$$$$$$$$$$$$$$$$$

Do not pass go and collect $200.00

purchase 500 shares of Facebook,make Zuckerberg Rich and take a beating on the I P O
Jun 10, 2014 5:52PM
"Why the Dow doesn't deserve to hit 17,000
The bull market in stocks is running for all the wrong reasons."

Well, thank you for that astute assessment, Captain Obvious. Most people already know this. The Fed has been loosey-goosey with their QE's and have inflated this market artificially.

Jun 10, 2014 6:03PM
Retired and live totally off my investments.  And, I live a half way decent life style.  Some would say a lot better than half way.  However if I would have listened to all of the doom and gloom and scare predictions in these various blogs and columns, I would probably be looking for a job at age 75, without any money.  What I have learned and lived, is simply, investing is for he long haul.  Make a plan, and stick with it.  Even in those scary times ilk 08.  
Jun 10, 2014 6:39PM
The dow is reaching new heights mostly because  the feds are flooding the financial markets with the electronic version of printing money. 
Jun 10, 2014 3:10PM
Up 155% in five years, that's less than 11% per year.  Sounds about right to me, regardless of bulls vs bears, etc.  

For a good analogy, order up 20 new credit cards today, each with a $15K limit.  That will give you an extra $300,000 to spend.  Then make the minimum payments and say you have reduced the deficit (monthly expense) over what you did when you only had one credit card and lived within your means.  This is what our government has done.  In eight short years (2016), we will have doubled the national debt, from what took 220 years to accumulate the first half (1789-2009).  

When we get close to no longer being able to make the minimum payment, get out of the market.  Until then, enjoy the 10% average return.  With 0% interest it could be a while.  

Jun 10, 2014 6:26PM
that's totally dumb statement of course it deserves 27,000 to 37,000 and on. the non profit companies CEO's deserves their billions do they not?
Jun 10, 2014 4:21PM
The market is ENTITLED to hit 50,000 --- just like everyone is ENTITLED to a much higher minimum wage and healthcare, etc etc.

Jun 10, 2014 6:16PM
 "What I have learned and lived, is simply, investing is for he long haul.  Make a plan, and stick with it.  Even in those scary times ilk 08."

What this guy is basically saying, if the Markets turn for the worse, he's totally screwed. 
Jun 10, 2014 5:18PM
So many people on here making comments about which they know nothing of market principles or investing..... Only thing they know is they invested a few dollars once and lost most of their money and won't ever invest again...... And this is probably best for them. If you know nothing about investing then find someone who can manage your money for you assuming you have money.  
Jun 10, 2014 5:27PM
Deserves got nothin' to do with it.
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