Everyone is celebrating the Dow Jones Industrials' foray over the 10,000 level. Yet while skeptics can point out that all it does is get us back to a level we first passed 10 years ago, focusing on just the raw number misses some crucial details. The Dow's return to the five-figure mark reveals some of the fundamental market changes we've seen since the bear market was in full force this time last year.
The Dow passed 10,000 in the opposite direction last October, on its way down to its eventual March low around 6,500. However, don't let that trick you into thinking that nothing has changed in the past year. Although the Dow's value is the same as it was then, its individual components show just how dynamic the average has been since the last time the Dow closed above 10,000:
- Some of the best-performing stocks, including IBM and 3M (NYSE: MMM ) , are also among the highest-priced Dow stocks. That has made their gains more significant, because of the way the Dow is calculated.
- Meanwhile, some of the stocks that held up the best during 2008's bear market, such as Wal-Mart Stores (NYSE: WMT ) and McDonald's, have found themselves on the losing end this time around.
- Although investors have focused on prospects for broad industries during the bear market, you'll find winners and losers within each industry. For instance, among financial stocks, JPMorgan Chase (NYSE: JPM ) has held its own fairly well in the past year, while Bank of America (NYSE: BAC ) has continued to struggle back toward its October 2008 levels, despite a nice bounce since March.
The differences are much more pronounced if you go back to the first time the Dow passed 10,000. Caterpillar (NYSE: CAT ) has more than tripled, while Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) have both lost 40% or more of their value.
All of that is really just trivia, though. The lesson is that market indexes are made up of individual stocks, and while they may often move in tandem, the best companies will eventually prove their superiority with great stock performance.
We're still down
From a big-picture perspective, passing through Dow 10,000 once more is just another sign of just how far we have to go before recovering all of our losses during the bear market. Even though the measure is up more than 50% since March, it hasn't even earned back half its losses from its record high above 14,200 just two years ago.
Those levels reflect in large part the great uncertainty that most investors have about the future. We've seen huge gains as the immediate prospect of financial Armageddon gave way to signs of hope and recovery. We've seen economic data that at least suggests the possibility that things will stop getting worse soon, and at best could indicate a true turnaround.
Yet those gains have come at a price. The government has taken unprecedented measures to stimulate economic growth. Leaving aside the issue of whether those actions have worked, the bigger question is what will happen when the government decides to stop providing that support. If the economy becomes too dependent on extraordinary programs, then the true day of reckoning may well be yet to come.
As far as your own personal investing goes, you can safely ignore all the hullabaloo about Dow 10,000. If you've stuck with your long-term investing strategy, then you've hopefully been buying stocks steadily throughout the downturn and the ensuing rally and are sitting on some profits for the first time in a while.
Whether the economy recovers fully in 2010 or takes longer to work out its problems is only important if you expect to cash out in the next year or two. If you have a long time horizon, you'll want to pay more attention to the lasting long-term impact than recent changes may have on the economy, and invest accordingly.