Jeff Sexton

Friday, July 20, 2007

1400

A record high on the Dow Jones Industrial Average is getting a lot of news
today. The index has reached 14,000 for the first time. In reality, this
is not important for several reasons.

First, this index is not an overall indicator of the economy, or even the
New York exchange, that is suitable for any sort of general use. It is an
index calculated from the trading values of the shares a small handful of
companies selected by relatively arbitrary means. It's not a useless
number, but it is not meaningful as the sort of general, universal,
indicator of, well, anything at all, that one might think it is given the
media coverage.

Secondly, a record value on this index is not in and of itself significant
of anything. Due to inflation, the prices of everything gradually
increases over time, including the value of stocks. The index is an
absolute value, just like the amount of dollars printed each year, or the
number of dollars StarBucks charges for a cup of coffee. And like the
amount of dollars printed each year and the number of dollars StarBucks
charges for a cup of coffee, the price of stocks goes up. So, adjusted
for inflation (and other factors) and stock market is no where near a
"record high". Likewise, "record highs" are inevitable.

In addition, this index, even if it was truly "high", is not an indicator
of the health of the market. One could argue that the market was
certainly not healthy in the late 1990's when such records had been broken
with great frequency.

Lastly, 14,000 is just a number. I doubt we'll see a media frenzy when
the market index reaches 14,021.38 even though 14,021.38 is just as
important as 14,000.

So it's easy to see that the market index has just about nothing to do
with reality. In fact, much of the mechanism by which investors succeed
of fail in the stock market has little to do with the values of real
assets.

In reality, the index is not important. But we're not talking about
reality here. And that is of course exactly the point of the stock
market, and exactly why it works, as exactly why 14,000 is important after
all.

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