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Dow hits a new record, so what?

Start whistling a happy tune because happy days are here again. Right? The Dow Jones industrial average closed at a record high again. On Tuesday, it topped off at 14,559.65.
The more relevant index, Standard & Poor’s 500 index, closed just 2 points shy of its all-time high of 1565.15 set in October 2007, Reuters reported in Tuesday’s story, “Wall Street climbs on economic data; S&P near record close.”
There seems to be a lot of preoccupation in the financial media with record highs. Sure, it makes a snazzy headline. But what does it mean?
For proponents of technical analysis, certain prices seem to be harder to break through than others — either on the way up or the way down. They’re known as levels of support or resistance and represent psychological barriers. They tend to be numbers around which investors make decisions either for or against a certain security.
For the rest of us, record highs may not be as significant. The stratospheric heights the indexes are reaching these days indicate two things, according to Robert Barone, chief economist and portfolio manager at Universal Value Advisors in Reno, Nev.
“It tells us one thing for sure: Don’t fight the Fed,” he says. One side effect, bug or feature of the quantitative easing programs from the central bank has been to inject vast quantities of money into the financial system — much of which has gone into equities.
“The Fed has liquefied at least the U.S. if not the whole world, and we have a lot of money sloshing around looking for a return,” says Barone. Read more about that in “How the Fed fuels stock prices.”
Monetary policy may not be the only driver. It could be part of the so-called new normal, the post-financial-crisis reality. Relatively sluggish economic growth may be par for the course now, says Barone. Instead of looking back to 2006-2007 and saying that gross domestic product and unemployment should be at those levels, maybe the economy simply doesn’t have the growth potential that it once did.
“Job openings are rising but the jobs aren’t being filled. There is a shortage of skilled labor. Capacity utilization in the industrial sector is approaching what it was in ’07,” says Barone.
“But we’re not happy because we have 7.5 percent unemployment, and we think it should be 4 percent or 5 percent. Putting it all together, it tells you that maybe the stock market isn’t too high,” he says.
What do you think? Is it too high? Where should it be? What’s going on? There are so many questions.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.


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