3 reasons the Dow shouldn't be at 17,000

This has to be the most unenthusiastic rally in a generation. Here's why the gain feels empty.

By MSN Money Partner Jul 3, 2014 12:52PM
Credit: © Pedro Antonio Salaverría Calahorra/Getty Images

Caption: Stop signBy David Weidner, MarketWatch

The Dow Jones Industrial Average ($INDU) passed the 17,000 mark Thursday, 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 goes 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 much 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. 

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. The Investment Company Institute reported that investors last week actually pulled $2.19 billion from U.S. stock mutual funds in the week ended June 18, after pulling $2.8 billion the week before. Investors have pulled $10 billion out of U.S. stock mutual funds in the last five weeks, according to ICI.

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, at 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.

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 it's 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 and 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

Jul 3, 2014 1:27PM
The gains feel empty because they aren't based on anything substantive.
Jul 3, 2014 1:27PM
Reason #4, the government is over $17 trillion dollars in debt.
Jul 3, 2014 1:34PM

We are now five years into an economic recovery that began in mid-2009, according to the National Bureau of Economic Research. 

Why do they keep telling that silly lie?

Jul 3, 2014 2:04PM
The raw number of jobs may be back, but certainly not the average quality (and pay level) of the jobs.
Jul 3, 2014 1:44PM
The low interst rates are the main reason. Retired people can't survive long on what a savings account pays. They are almost forced into the market. 
Jul 3, 2014 1:31PM
The PROSTITUTES on Wall Street are playing with FREE $$$$ !!!

Where else could they multiply it ?
Jul 3, 2014 2:25PM
Don't worry, the 10 MILLION MORE ILLEGAL IMMIGRANTS invited here by 0bama will help the economy,..well,...just as soon as they get treated for their morbid contagious third world diseases, then grow up, then get off welfare, then bring the other 18 members of their family here,...and finally undercut your salary and take your job. Hell,..maybe they'll even learn English along the way! Trust 0bama,.. It will all work out, just be patient, open the borders, sit back and relax.
Jul 3, 2014 1:28PM

"The Dow Jones Industrial Average () passed the 17,000 mark Thursday, but it just doesn't feel right. It has to be the most unenthusiastic rally in a generation -- maybe more."


There's no reason to get excited about the stock market.  Everything else going on in the country - the stuff that actually MATTERS - is going downhill faster than the speed of light.


When the stock market crashes hard (and trust me, it will), what're you going to crow about then, MSN?  What do you have left to shout from the rooftops about?


The real things that matter (unemployment, forecosures, waves of illegal immigrants invading the country, etc.) are all in dire straits right now, and there's no hope for them to improve anywhere on the horizon.

Jul 3, 2014 1:48PM

-  We are now five years into an economic recovery"  WE???  "economic recovery" - Where?

-  last week we finally recovered the jobs lost since the financial and housing crises hit. " - as per 'gubmnt' figures.  urkel's admin only adds, they do not subtract jo loses.

- "GDP contracted at a 1 percent annual rate in the first quarter" - Finally, an actual FACT proving manipulation of the numbers.

Jul 3, 2014 1:51PM
It is what it is, stop trying to figure it out, you'll get a head ache. Nothing about the market ever makes any sense.
Jul 3, 2014 1:30PM
I can name more reasons for it to be above $17K By several more thousand $, Main one is that buying power of the dollar is so far down that  to be even to what the Dow was at $12K it should now be $24 K at least to maintain equal value....think about it. A good pick-up truck will now set you back about $50 grand when just a few years ago it was around $25K. Example, in 06 I bought a 2500 Ram for $33.1k include tag, title and tax....same truck in 14 runs over $70K, sure it was deck out with all bells and whistles. It is a great truck.....
Jul 3, 2014 2:41PM
I just don't get all the naysayers on this thread.  I am full-on GOP and cannot wait for the upcoming elections, but quit blaming Obama or Bush or the Fed for all your woes.  The economy cratered in 2008 and we are coming out of it on a slow burn.  It may possibly be the best way of recovery because it evens out the high/lows.  I have to believe all the pessimists are just angry that they didn't buy low (or just hold on to existing positions of the day) and hold on through the recovery.  If they did, they would be overjoyed right now.  Like me.  And don't reply with a weak-****, "the market is going to crater soon and you will sing a different tune."  I am counting on the market to crater.  I will be the guy buying when everyone else is panic selling.  I am patient, and I get rewarded for that patience.  Risk cuts both ways.  Understand that, and you can make $$$$.  Besides, if you can't be upbeat and optimistic about the world's greatest country and economy (no matter who's in power), what's the point?  How do you live your life with a broken clock mentality that will eventually prove right?  But here's the real question to ask yourselves:  when the market does tank again (and it will), what are you going to do?  Buy or sit on your hands saying, "I told you so, I told you so!"
Jul 3, 2014 2:29PM
how is it that there are around 320,000 people a week applying for unemployment and today it was announced that 200,000+ new jobs were created during the whole month and the unemployment rate went down to 6.1%
Since the bulk of these jobs are part time and pay in the minimum wage range they should even be counted. Those aren't jobs, they are a distraction to the person who is dying financially. No benefits, no perks, no nuthin'. 
thank you obama for creating the serf class in Amerika. You should be proud. But we all know these are the same people who will vote hacks into office because they are afraid of losing their government handouts. the sad thing is they are too ignorant to know the difference.
Jul 3, 2014 1:59PM
The only thing more insane then posters lying and saying there was no Recover are some posters behaving as if the Global Debt hasn't risen 40% since the Great Recession. Political posturing isn't going to solve our Problems. Nor will DOW 17,000. We have a Massive Global Debt Problem on our Hands, nothing is being done to Solve those issues. In fact, we are daily making it Far Worse.
Jul 3, 2014 2:20PM
the rich get richer and the poor get to pay for it.
Jul 3, 2014 2:09PM
Volume tells the whole story. No broad interest in Little Las Vegas.
Jul 3, 2014 3:17PM
" Investors have pulled $10 billion out of U.S. stock mutual funds in the last five weeks, according to ICI." 

Meanwhile to US Gov has pumped in around $80 Billion into the market during the same time period and has been pumping $65 Billion per month for the past several years..... Once the Fed stops the easy money the market is gonna crash. The market drops every time they just mention slowing the pump...
Jul 3, 2014 1:51PM
No one looses unless they sell low.  No one profits unless they sell high.  So, if people are selling somebody is buying.  Since the market is rising, we know the sellers are making a profit because the price they are selling at is higher than they bought at.  You must sell to make a profit.  The smart guys selling a bit and are setting a bunch of the profits aside to buy low after the fall.  In a rising market like this, as the drop is more inevitable, take your initial stake out plus some profit and play only with the house's money.  That way you make real money and loose only imaginary money. Then buy at the bottom and sell later to make more real money from the guys that lost real money selling low.  Is this so hard to understand?
Jul 3, 2014 2:57PM

We can keep tee shirts , underwaer and flat screen tv`s  the same price for years to come , therefore we can keep int rates at zero,  YES , no cola increase or rate increase , the Govt had to start lying about inflation because the`ve borrowed and printed so much because of foolish wars and the breeding of millions of single moms

Jul 3, 2014 1:58PM
How's about because the economy is still contracting and has been falling since 0bama took office.. Most financial 'experts' are just morons whistling past the graveyard,..and some are gravediggers,..and the media is playing the role of funeral director.
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