The Dow's Lost Decade Finally Finds Its Way

Today, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) surpassed its previous all-time intraday high of 14,198.1, set in October 2007. Since then, we've been through a global financial crisis, a sovereign-debt crisis in Europe, a stimulus package in the U.S., the debt ceiling debate, and, most recently, sequestration cuts (just to name a few). The bottom line: It's been a long half-decade for investors.

Through all of these challenges, the market has come back strong, and stocks have recovered losses that devastated portfolios around the world. Here's what we should and shouldn't care about today.

What we can read into the record
There's no doubt this has been the most stressful time to be an investor in my lifetime. We haven't seen financial and economic devastation quite like this since the Great Depression, but the U.S. economy has been amazingly resilient. The job isn't done; unemployment is too high, the national debt is too great, and economic growth is still pretty anemic. But the Dow clearing a record high is one more psychological hurdle on our way to a recovery.

There are a few big reasons the Dow's level is important in the current environment. Stocks are generally valued based on the past and future profits of a company, so a new high means investors see a good future. With that focus on the future, stocks are a leading indicator of the economy. For example, the market topped in October of 2007, nearly a year before Lehman Brothers collapsed, which is when panic really set in. If we're hitting a new high now, it means investors are betting that the economy and company profits will improve in the future, which should be good for employment, profits, and even the deficit.

Why the psychology matters
I'm not one to put much stock in technical indicators, and I don't think a new high is some magical "buy" signal, but it is an important psychological barrier, if nothing else. Investors are looking for ways to compare the current market to the past, and if we're reaching a new high, then maybe the market is healthier than we think it is.

From a business perspective, it may be even more important. The Great Recession was fed by fear and uncertainty. When companies couldn't see the bottom of the economic hole, they cut more, making the hole bigger and thus making for more cuts. It was a negative reinforcing cycle.

Today, the pieces are in place for the opposite end of the reinforcing loop. Companies have cash to invest, consumers are confident again, unemployment is falling (slowly), and forward-thinking companies are investing in the future. Does the Dow's reaching a new high change any of these indicators? No, but when you cross a record high, it may give some reason to think the economy isn't as bad as the politicians or pundits might say. If Wall Street has looked past the debt ceiling, the sequester, and unemployment, perhaps it's time to hire some workers?

What today really means
What really happened today is that the 30 stocks chosen to compose the Dow Jones Industrial Average have crossed a milestone not seen in more than five years -- nothing more.

Take that as an indication that the economy is recovering or that the worst of the Great Recession is behind us, but don't think it's a golden "buy" signal for investors. If you find a stock that's a value today, it's as good a day to buy as it was yesterday or will be tomorrow.

At the end of the day, today's record only means we've gotten back to where we were more than five years ago -- a depressing reminder for most investors.

Stocks for the long-term investor
If you're looking for some long-term investing ideas as the market hits record highs, check out the Fool's special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.


Read/Post Comments (27) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2013, at 12:23 PM, ctharwick wrote:

    I wouldn't run out and buy a million dollar boat.This could all disappear in a month or two????I don't believe this economy is to stable.But hope springs eternal.!!!!!!!!!!!!!!!

  • Report this Comment On March 05, 2013, at 12:42 PM, JohnCLeven wrote:

    The Dow is supposed to be reaching all-time highs. Businesses are making more now than they were in 2007, and the markets should reflect that.

  • Report this Comment On March 05, 2013, at 1:17 PM, whereaminow wrote:

    The Federal Reserve is printing its way to utopian prosperity once again. No way this doesn't come all crashing down in the future ;)

    David in Liberty

  • Report this Comment On March 05, 2013, at 1:29 PM, DavidWTaylor wrote:

    DOW and S&P 500 are low if your measure it in gold.

    In 1928 S&P 500 was 1.1 once of gold and today it is 0.96.

    In any case the question is regarding your enter/exit timing.

    At the beginning of 2013 very few investors' accurately estimated the north market direction.

    One of the accurate forecasts published on December 27 on ** I KNOW FIRST** site

    US economy is recovering.

    Good Luck!

  • Report this Comment On March 05, 2013, at 1:43 PM, Stonewashed wrote:

    I just spoke with my accountant. He says this level in today's dollars is myoptic deception.

  • Report this Comment On March 05, 2013, at 1:49 PM, Darwood11 wrote:

    James Keegan, chief executive of fixed-income money manager Seix Investment Advisors as quoted in the WSJ: "He points out over the past 12 years, U.S. stocks have dropped 40% from peak to trough, twice."

  • Report this Comment On March 05, 2013, at 3:42 PM, HectorLemans wrote:

    If you cashed out after the financial panic and are just now dipping your toe into the stock market, YOUR DOING IT WRONG.

    May I suggest a friendly visit with a good financial planner

  • Report this Comment On March 05, 2013, at 4:33 PM, sheldonross wrote:

    I'm guessing this isn't adjusted for inflation?

    So in reality, it's still quite a ways off.

    Back of the paper calc 1.03^5.5 ~ 1.17

    So about 17% lower than it's earlier peak.

  • Report this Comment On March 05, 2013, at 5:13 PM, Chontichajim wrote:

    It hasn't been the most stressful decade of investing in my lifetime, but that just means I am older than the writer.

    The decline in 2009 was across the board with most companies recovering (except financials). It was also a good measure of dividend security. For every DOW or GE that failed to keep their dividends there are corresponding companies in the same sector that did. One more measure to use in selecting individual stocks.

  • Report this Comment On March 05, 2013, at 5:23 PM, techseer wrote:

    So nice to read: "negative reinforcing cycle". This is both clear and correct. More often the incoorect phrase "negative feedback cycle" is used by analyst. Neg feedback actually stabilizes systems as opposed to making them spin out of control. So Travis gets smart-cookie points for the day (plus anyone who likes foo fighters should be okay!!)

  • Report this Comment On March 05, 2013, at 5:28 PM, frogburger wrote:

    I can't believe I'm reading this on the fool.com. Is it a pitch for the Obama's administration?

    Listening to business media in Europe, many talk about the "inflation" in the market because of quantitative easing. Let's be honest and adult here: a new bubble is being created.

  • Report this Comment On March 05, 2013, at 5:41 PM, Gowithit wrote:

    It seems to me that because of the new record, people seems to be missing how fast and high this market has actually risen. 3 out of 4 years of 15% or more growth is a huge rally. Is that common psychology in crashes? A lot of people sound like they are thinkng we're just getting started (especially since the news cycle seems to have a lot less of the total doom situations), when I just haven't seen anything in the news cycle that tells me it's not going to go back into fit and start mode once people actually look back.

  • Report this Comment On March 05, 2013, at 5:42 PM, frogburger wrote:

    If you guys can understand French, watch this. No bullcrap from US media or from the Fool.com authors either. http://www.youtube.com/watch?v=Z6TRAJeTfZM

  • Report this Comment On March 05, 2013, at 5:43 PM, thunderboltnova wrote:

    Funny how in 2000 and 2007, we never heard the word "crash." I guess we're going higher.

  • Report this Comment On March 05, 2013, at 5:51 PM, dgmennie wrote:

    There are few 'human' investors left in the stock market, just a big collection of hedge funds, pension funds, and other giant trading positions controlled by computers. When most of these digital morons decide to sell, watch out. Billions/trillions of pretend play money will disappear in a few seconds.

    "...today's DJIA record high only means we've gotten back to where we were more than five years ago -- a depressing reminder for most investors."

    I could not agree more, Travis!

  • Report this Comment On March 05, 2013, at 5:56 PM, xetn wrote:

    You can thank the Federal Reserve (which is neither federal or a reserve) for the highs of the Dow, etc. They have been creating billions of new currency units every month on top of the previous QEs that attemped to boost the economy, but has failed. All that new money has to go somewhere and a lot is ending up in stocks and real estate. A new bubble is being born and like 2008 will end in a new crash at some time in the future, especially when the Fed thinks they have done enough damage to end their QEs.

    As for now, I'm guessing the next big crash will be bonds.

  • Report this Comment On March 05, 2013, at 6:03 PM, 1pOwedyank wrote:

    We are back to point we shouldn't have been at in the first place. Gosh I wonder what will happen next.

  • Report this Comment On March 05, 2013, at 6:04 PM, frogburger wrote:

    We seem to agree the author of this article needs to stop writing.

  • Report this Comment On March 05, 2013, at 6:15 PM, Goldbugg wrote:

    Welcome to the Bernanke bubble. A bubble which may prove to blow up larger than any bubble previously know to man. When the Bernanke bubble pops we will all need an ineffable amount of peanut butter to clean the viscous sludge from our hair. Might I suggest making a substantial investment in Hormel now.

  • Report this Comment On March 05, 2013, at 6:19 PM, SuntanIronMan wrote:

    If we added in dividends, I believe the DJIA reached new all-time highs in 2011.

  • Report this Comment On March 05, 2013, at 10:35 PM, thunderboltnova wrote:

    Make a shopping list and pray for another crash. Think of all those Blue Chips you want to buy.

  • Report this Comment On March 05, 2013, at 10:50 PM, NOTvuffett wrote:

    a crash would be better than the theory that debt equals weath

  • Report this Comment On March 06, 2013, at 1:57 AM, BHOmustGO wrote:

    Dear Travis:

    With all due respect (using Hillary's language at the Benghazi hearings), I believe you have not enhanced The Motley Fool's image. I am sincerely disappointed in this article.

    First: You omitted mentioning Bernanke's $85 billion per month seed money for the stock market. His purchases of government debt forces investors and foreign countries to buy stocks which artificially props up the market.

    Second: You state..."perhaps it's time to hire some workers?" As a 73 year old retired multi-unit restaurant owner/operator starting with a Sambo's Family Restaurant in 1967, I can unequivocally tell you that there is no rational business owner in the world who would hire one single employee if the "business coming in the door" didn't increase to the point where the existing staff could not handle the extra business, thereby affecting good customer service. It matters not how much money is sitting in the bank or what type of business you own. YOU DO NOT HIRE FOR THE SAKE OF HIRING....unless you want to go belly up or feel philanthropic.

    Travis, I'm sorry for being so negative, but we get enough pollyanna pap spewed by the Complicit Obama Media Complex, that I have little tolerance to read the "rose colored" comments here, in such a respectable site as The Motley Fool.

  • Report this Comment On March 06, 2013, at 8:48 AM, TomBooker wrote:

    I embrace the guarded positive perspective, but the math of compounded inflation tells me we are ~18% below, and a lot more so in real inflation and real costs of living.

    While the NeoClassical/Neo-Liberal capitalists of the prominent belief systems high five themselves over their well-wallpapered Disaster, the rest of us wait for someone to call it what it is.

    And by doing so, commence the changes to honestly and truly make as whole again.

  • Report this Comment On March 06, 2013, at 9:17 AM, Jamesband wrote:

    Our government, both parties, for decades has done everything in their power to tip the markets through socialist policies and social engineering. The markets, despite this all out war on capitalism has, and will continue to backfire on their house of cards. Even government austerity, Socialism’s bitter fruit, has not stopped even the PIGGS market resurgence while their politicians, and union thugs flounder. Yes there is volatility, people are scared by governments, as well they should be. All governments, even ours, takes from its citizens by force, i.e. taxes, spends without business restraints i.e. budgets, and participates in crony capitalism i.e. ethanol, failed solar companies, subsidize subsidize subsidize…. Government stupidity has no bounds, but markets and true capitalism will always prevail, even if it has to go underground for short duration i.e. 2008-2010, 11. Governments all over the world are still a complete mess, nothing is actually fixed, just bandaged, lipstick on a pig will not change this, but the markets don’t care anymore, that’s what the new high is telling us… government be damned.

  • Report this Comment On March 06, 2013, at 3:49 PM, Dwightfish wrote:

    I sense a lot of negativity in the room. Are all of you bubble predictors and down with the government fanatics still sitting on the sidelines are or you in the market? Maybe there is a lot of confusion in the markets but I can not believe that you have been sitting this out because of your apprehension. I would agree that if you are not in already you should stay on the side until it proves not to be a sucker rally. However your political position will not turn a profit.

  • Report this Comment On March 06, 2013, at 5:37 PM, thunderboltnova wrote:

    Yeah we're all peed off since all the economists told us to stay on the sidelines and wait for the second crash. It never came so now here we are going to new highs. We're also thinking of all the cash we lost while selling at the bottom.

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