Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet

How did the Dow break 10,000 when the rest of the economy is in the toilet?

1. Corporate earnings are up — mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies’ costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don’t have jobs or are afraid of losing them, they won’t buy, and company profits will disappear. 2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can’t keep up forever, though.

3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That’s good news for the Street because it means money stays cheap — and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street’s earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.

4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you’re one of the last in.

In other words, this is all temporary fluff, folks. Anyone who hasn’t learned by now that there’s almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

4 Responses to "Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet"

  1. Ethan S. Burger   October 17, 2009 at 2:17 pm

    Greetings:The DOW is the equivalent of a selective national weather report. Its relevance is limited to comparing the index within a fixed period and perhaps its movements to economic data or public opinion.I continue to be perplexed why so few U.S. newspapers, economists, and commentators monitor on a regular basis the DOW if it were measured in other currencies (e.g. the Euro, Yen, etc. or commodities such as oil, gold, uranium, etc.).If the later were regularly analyzed, few people would contest Professor Reich’s observations.Furthermore, a large share of the world’s economic activity occurs in “grey” or “black” markets or are barter transactions. Thus, attempts to deal with aggregate economic activity will always be imperfect — their only value exists in analyzing trends.Sincerely,Ethan S. Burger

  2. Guest   October 20, 2009 at 7:56 am

    It’s almost too funny that once again all the shills and pundits of wall street are falling all over themselves about how good times are ahead because the Dow anticipates a recovery. Where were all these geniuses two years ago when the Dow was reaching new highs. None of these imbeciles (or the Dow) saw the carnage that was to come…nor will they see the next wave of carnage. Watching the market touts is like watching a traveling clown act.