Why An 11000 DJIA Means So Little

The Dow broke through a critical psychological limit mere days ago--but here's why that doesn't matter to most.

Did you hear? The Dow just cleared eleven thousand! Yahoo! Yippee! Um...why's everybody so glum?

Oh, wait...word is the National Federation of Independent Business' monthly measure of small business optimism fell for the eighteenth month in a row. And unemployment is still massive...and most people's 401k's still haven't recovered, and a growing number of people are mailing their house keys to their bank with no forwarding address, and...and...

It's really not a surprise to hear people like Lynn Tilton, founder and CEO of Patriarch Partners, say things like "I think there's a huge disconnect between the stock market and the real economy." It's doubly surprising, frankly, to think this is news. There never really has been much connection between the market and the rest of the economy. Why should there be? Even popular conventional wisdom will tell you that the market is what's called a "leading indicator", or rather, a premonition of how the rest of the economy will behave in the later term. Remember--unemployment and jingle mail and all the rest of that stuff was pretty low when the market started its gigantic selloff hemorrage. Everything else took some time to catch up. And now that the market's bouncing back, it portends good things a-comin'...right?

Not always, of course. But this does go to explain WHY there is a disconnect between the stock market and the real economy. It also helps explain why liquidity is doing great on Wall Street, but not so great for anything much smaller than, say, Microsoft. And it also explains why the NFIB's survey showed weakness in the two most critical points for the economy: "Plan to Hire" and "Increased Capital Spending".

With those two critical measures dropping across small business, it really doesn't matter what the market's doing...at least, not in the short term.  And for savers and investors out there, it's not just the contrarians suggesting gold, silver, oil and Dow puts.

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Comments

  • Erick B

    April 17, 2010

    Hi Steve.

    The quote you mentioned from Lynn Tilton above was from Yahoo! Finance this week, http://bit.ly/a8b0hX.

    For your readers who don't know about Lynn, she's a remarkable lady who owns diverse companies across many industries. She has a unique and intimate perspective on the dire state of our economy and the solutions needed to support American industry and spur long-term job creation.

    If you're feeling brave, check out this podcast from NPR's Planet Money, "A Private Equity Boss in Four-Inch Stilettos."
    http://www.npr.org/blogs/money/2010/03/post_6.html

  • SteveAnderson

    April 18, 2010

    And I also think she's right--there IS a massive disconnect. Though I'm not sure why she's surprised about it enough to suddenly make the quote; she should've known about the disconnect from the word go. But thanks for the extra information on Lynn!

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