I‘m just old enough to recall when the Dow hit 1,000. I was in the second grade and our Social Studies teacher devoted the election week to a discussion of politics and business. When the Dow hit 1,000 she asked my father to come in and explain the basics of the stock market to our class.
He began by explaining the difference between a bull market and a bear market and told us that the stock market is a good bet in the long run, but it can be risky in the short run. When my teacher—Miss Reed—asked him if this is a good time to buy, he replied that when teachers and cops are going into the stock market, it’s time to sell. The Dow fell 40 percent in the subsequent two years.
20,000 is a nice round number, and the press loves to seize on milestones—real or otherwise—as a hook to opine on the broader meaning of something. But the number means little.
The stock market is dear right now, with average prices exceedingly high relative to earnings. Each time that ratio has reached such exalted heights the Dow has tumbled precipitously.
What’s different today is that interest rates are at rock bottom, and there’s no where else to park money and make a buck. So, trillions of dollars have flowed into the U.S. stock market. As long as that is the case, the market may keep its high valuations. Also, if corporate profits keep growing (they fell in 2015 but made up a good portion of the decline last year) we may get to a more reasonable evaluation and the market could sustain its prices.
But the odds are that we’ll see another bear market in the next decade and we’ll cross the 20,000 rubicon again sometime down the road.
I have no idea when the next recession will come and no one else does either. In our postwar economy we’ve had less than a dozen recessions, each one slightly different than any other and with different causes, not all of which economists can agree about. It is sheer folly to look at other business cycles and declare that ours must be about over because most other expansions have kicked the bucket by this time. It’s akin to predicting an outfielder’s career based on 11 at bats.
It could very well be that we are in a new, permanent world of lower interest rates, and that the current expansion will get a boost from President Trump’s infrastructure spending and tax reform and simply power through the next lull in the economy and take us to new and greater heights.
But I’m betting on a bear market in the horizon, regardless of what our government achieves.
