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.
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.
A 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.
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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?
"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.
- 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.
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
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An interest rate tease in The Wall Street Journal sends the market into an optimistic tizzy -- but one that doesn't end quite at the top.
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