What’s Next for the Dow?!
Well, yesterday the Dow Jones Industrial Average (DJIA) crossed the 14,000 mile marker to set another all-time high as well as eclipse another pyschological barrier. It seems like any time the DJIA gets close to another 1,000 we hear the same talk re-hashed on the news about “How high can it go?” and “what will it do next?”
I wonder what the news commentaries sounded like back when the DJIA was trying to break 5,000 or 1,000. It would probably be comical to go back and listen to them actually. Imagine some market pundit on the screen being scoffed and laughed at for even suggesting DOW 10,000. Now for us to see DOW 10,000 we would have to have a major economic pull back. I mean, that would be shaving nearly 1/3 of the value off of the average at this point!
So, where does it go from here? Is it more likely to head higher? Or lower? Rather than focus on which “mile marker” (as defined by the 1,000 intervals that we now follow), let’s make it a little more short term and easier to follow. Will it be 13,500 or 14,500 that we see the Dow hit next? Who knows… anyone could make a good case for either one. Some say equities are over priced now, it’s time to pull some off of the table. Others proclaim the market has hit a nice stride and the economy is humming along nicely so enjoy the bull market and prosper from it.
So what exactly is causing this tremendous run-up? If you look at the chart for the past year it is a steady climb (minus a short downturn in or around March 2007) from 11,000 to 14,000 for the Dow.
China’s economy grew at an annualized rate of 11.9% for the second quarter this year according to Bloomberg.com. Perhaps that had something to do with it. I’m quite sure it did. With global companies like Procter & Gamble, Wal-Mart, and Coca Cola already doing business in China, it’s hard to imagine this large country’s growth NOT having an impact in some way.
It may also be that more and more people are buying stock because they feel they can earn a decent return on it relative to other investments. This is especially true when you look at it comparatively with the recent problems in the residential real estate market in many areas of the country. Also, if people feel they can earn 10-15% or more by putting their money in the stock market instead of paying off car loans at say 0-7% or home loans ranging from 6-8% then you can bet more people are staying in debt to invest their money and make a bigger return. Essentially they are using the power of leverage to generate higher returns with greater risk. The greater risk being that they still owe that money even if they lose it in the stock market… similar situation if more people are buying on margin.
Since we can’t get in every investor’s head we can only speculate. But we have to act rationally with our own investment decisions during a big run up in the market like this. Is now a good time to take a little off the table and lock in some gains? If you’ve been holding a steadily growing Dow component or other well-performing stock for the last year or more I would have to say yes it is. The long term capital gains tax and the trading costs shouldn’t eat away your return. A short term capital game might not be the best move unless you were buying in that small down turn that we mentioned in the first few months of the year.
Regardless when you bought or when you decide to buy or sell, use your head. Look at the P/E ratios. Look at the price you’re paying for those future earnings and make the call… do you think it’s sustained? Do you think it’s worth paying however much for those future earnings and dividends? Make an informed decision and remember that it’s ok to take profits. Here’s to Dow 15,000. Stay tuned!
As always, I welcome your comments and feedback…