The Dow's closing at the symbolic 10,000 mark yesterday has some people excited that maybe Washington really is doing the right thing. Jim Pinkerton says, "Obama should get some credit." But he immediately follows that up with:
...if I had borrowed, printed, or otherwise conjured up more than $12 trillion, and pumped it mostly into the financial sector, I could have made something happen. What would happen? Most likely, Wall Street would start, uh, bubbling again, even as unemployment rose and the rest of the country languished.
There are three reasons that come to mind that suggest that anyone who cites the Dow as evidence of the health of the underlying economy (and as a corollary, the efficacy of Obama's policies to revive the economy) is wrong. You'd be wrong if pre-2008 you had cited the run-up in housing prices as a sign of health. We could be seeing a new bubble at work.
1. 7,537, not 10,000 is the more important number.
It is good news that the Dow has gained 53 percent in seven months. Derek Thompson in The Atlantic says that the gains should "[put] to rest the silly argument peddled in the WSJ that the stock market was allergic to an Obama presidency."
But really, the 53 percent gain isn't that dramatic. Most of the news coverage has only been looking at nominal, not real, values. Comparing the Dow now to 1999 or, to a lesser extent, even earlier this year, is a bit of an apples-oranges comparison because the value of the dollar has fallen. If we index the Dow based on the value of the dollar (see here), we can view 1999 and 2009 on the same playing field. The Dow is at 7,537 relative to 10,000 in 1999, and has gone up only from 6,216 since February 27, 2009.
2. Much of the gains have come from exuberance in the financial sector.
The Obama administration (and Bush as well) and the Federal Reserve have kept the banking industry afloat with billions of dollars. Not surprisingly, their stocks have benefited immensely. John Browne says:
Just today, JP Morgan reported that profits surged sevenfold from the second to the third quarter of this year! In fact, over the past six months, stock performance of financial sector firms was 66% better than the S&P 500 as a whole.
But once the governmental support starts to wind down, can the financial giants hold up? No one really knows, and the market gains don't shed much light on the subject.
3. Unemployment still has a long way to go.
Yes, the jobs market tends to lag recovery. But unemployment is in such a deep hole that maybe investors have not fully recognized it yet. As I've reported before, if you look behind the basic jobless numbers, one finds that unemployment is not far from Great Depression levels.
But jobless claims have fallen recently to the lowest level since January, bringing signs of encouragement. Are firms, however, not laying off as many people because things are turning around, or because they already are down to skeleton crews? It's not clear.
What's the connection between unemployment and the Obama bubble? The stimulus still has its work cut out for it. If it fails to make significant inroads, investors will lose their optimism over Obama's policies that has fuelled some of the recent gains.