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5/20/2004

Dow at 10,000 smells no sweeter than 9,999

By Thomas Watterson
The Christian Science Monitor

Smart investors are supposed to pay attention to things like corporate earnings, industry trends, stock valuations, and the economy. But some investors seem unable to keep their eyes off big, round numbers like 10,000 on the Dow Jones Industrial Average.

But is 10,000 all that important?

“It is not a barrier because we passed it,” said Robert Shiller, an economics professor at Yale University. “But maybe it’s more of a floor. ... I think falling below 10,000 is kind of a psychological downer because 10,000 does have some impact, in that it was a big deal when it went above 10,000.”

In the five years since the Dow first crossed that threshold in 1999, the closely followed index seems to have had trouble going very far above that level.

The Dow did climb over 11,000 in 2000 before succumbing to the bear market and pulling back.

Since then, the DJIA has moved back and forth across the 10,000 threshold several times.

In December, it charged past the mark decisively and stayed above it until last Monday, when it sank to a 9990.02 close.

This pattern could persist for the next several years, but not because 10,000 is some kind of psychological barrier, Dr. Shiller said.

“People are starting to worry about what will happen when the Fed raises interest rates,” he said. “I think that is what has killed the market. It’s just kind of a coincidence that it’s back down to 10,000.”

Other experts tend to agree: “It’s just a number,” Jeff Molitor said of the 10,000 figure. Molitor is a principal in the portfolio-review division at the Vanguard Group in Valley Forge, Pa. “Dow 10,000 is no more particularly relevant than 7,622 or 12,958. The issue for investors is, over the long term, that they have the right asset allocation and, if they’re looking at just the stock market, what’s going to happen in terms of earnings and valuations.”

Wrong focus?

“I think it’s probably ridiculous to think that anybody with any experience in the market focuses on a number such as 10,000,” agrees Mark Sellers, a senior analyst at Morningstar Inc., in Chicago. “I can see where a lot of people might focus on it, but I think they tend to be the dumb money, not the smart money.”

But Stephen Bainbridge, an economist and law professor at UCLA, points out that many short-term investors have learned to make money by speculating that the market will gyrate when it hits key levels.

These investors use index futures and other devices to bet that stocks will sag as they hit a symbolic barrier like 10,000, he said.

But, in the long run, Bainbridge believes good economic news should eventually overcome the psychological barrier and let the Dow stay above 10,000, just as it eventually managed to stay above 1,000.

While Shiller agrees that investors may pay too much attention to round numbers, he also thinks people may have to get used to seeing the Dow in the 10,000 neighborhood for a while.

In April 2000, Shiller’s book, “Irrational Exuberance” warned of what he correctly saw as an overheated stock market.

At that time, he predicted that the Dow would still be hovering around 10,000 in the year 2020.

In the 1960s, Shiller recalls, “the Dow had a lot of trouble crossing 1,000. It seemed as though that was a barrier.”

Over the next few decades, however, the index managed to cross each new 1,000-point plateau and keep going — until it hit 11,000.

Since then, the DJIA has zigzagged around 10,000.

And nothing has occurred to change the prediction for 2020 that Shiller made in his book.

No peaks without valleys

Even if the Dow were to gain 40 percent over the next 15 years, he said, “it could just as easily be down 40 (percent) in real (inflation-adjusted) terms. So, yes, I think it’s quite possible the Dow could be at 10,000 in 15 years.”

Given that possibility, Shiller contends that a well-diversified portfolio should not include just different classes of U.S. stocks.

He would add some international stocks, inflation-indexed bonds, and even real estate.

“Real estate depends on what city you’re in,” he notes. “There are some, like Los Angeles, that look too bubbly right now. But in a lot of other cities, an investment in a home will probably beat the stock market.”