Up, Up and Away… Or So It Seems

My congratulations to the Dow Jones Industrial Average. The world’s most widely followed stock index hit a new record high of 12,582 yesterday.

It’s up, up and away for the Dow Jones. But maybe it’s just the way it seems…

We start, my dear friend, with the key factor as to why stocks go up. And that is liquidity. The financial markets today are full of liquidity. An ever-increasing number of mutual funds, institutional investors, and hedge fund are chasing the 30 big stocks that comprise the Dow Jones Industrial Average.

Sometimes I get the feeling that Wall Street likes pushing up the price of the Dow stocks because that’s what the media talks about. Listen to the business reports on the radio, watch them on TV, or read them on the internet or in the newspapers. The Dow Jones Industrial Average is the main index they are all talking about. So, what the heck? Wall Street might as well push that index up just so investors feel good. Who knows, maybe they’ll buy more and Wall Street can make more money.

But, a closer look at the Dow Jones reveals several interesting points for my readers. The Dow is up an average of 1.3% per year over the past six years. Even if we take the Dow’s pathetic dividend yield into account, investors would have been better off just by buying straight T-bills during the past six years — they’d be further ahead today without the risk of investing in stocks.

If we take inflation into account, the average annual return of the Dow Jones Industrial Average has actually been negative over the past six years! Now that’s quite thought provoking. All that liquidity in the financial markets. All those retirement plans that just continue to bloat each year with more money. And still, the Dow Jones Industrial Average, after taking into account inflation, is in a negative return position over the past six years.

As one of my younger children would say, “Wassup?” I’ll tell you what’s up. In reality, again taking inflation into account, the Dow Jones Industrial Average was higher six years ago than it is today.

Wall Street likes investors to feel good, so they keep their stock holdings and hopefully buy more. It sounds good to hear that the Dow was up 15% last year. Sounds like a good number over a one-year period. But simple analysis, as illustrated above, quickly shows the Dow is just spinning its wheels.

The smart money? It’s moved into precious metals. Gold bullion was up 20% again last year. But Wall Street and the powers that be would rather you not notice that. No, they’d like to tell the same old stock story, because that’s where they make their money.