Big, round numbers are hard to ignore. That’s why we pay attention when the odometer clicks over to 100,000 miles, and why the world threw a party at the dawn of 2000 instead of the technical start of the millennium in 2001.
It’s no different on Wall Street. When the Dow Jones industrial average briefly crossed 13,000 a couple of times this week, a milestone it hadn’t reached since before the financial crisis in May 2008, people took notice.
Some observers said it was a sign of a stronger U.S. economy. Casual investors wondered whether it was time to get back into stocks after fleeing to bonds or just stuffing their money under the mattress in the terrifying economic meltdown.
But a word of caution: 13,000 is just a number.
It gives politicians something to talk about. It gives regular people something to measure against. It can stir up excitement, but it doesn’t change the elements of the economy, such as the number of people out of work or the number of empty houses.
The Dow also isn’t the best measure of the stock market. It follows 30 companies — important ones, household names — but only 30. And it’s weighted so just a handful of the most expensive stocks carry the most weight.
If Apple, whose stock has skyrocketed this year from $405 to $522, had been added to the Dow on Jan. 1, the index would already be above 14,000, according to estimates this week from ConvergEx Execution Solutions.
And the Dow is certainly not the best measure of the economy. It can rise even when jobs are falling or the economy is shrinking.
"Psychologically, it matters," said Dan McMahon, director of equity trading at Raymond James, who was underwhelmed by the Dow’s short foray above 13,000 this week. "Technically and fundamentally, not so much."
The Dow closed Friday at 12,982.85, down 1.74 points.
It’s the same mind game when people turn 40. They’re only a day older, but it feels more significant. Retailers understand this trick, too. That’s why they slap $99 on a price tag instead of $100. That one dollar feels like a lot.
Keep in mind also that the market is a fickle barometer. Some institutional investors, such as hedge funds or private-equity firms whose employees follow the market for a living, will consider the 13,000 mark a signal to get out, not in.
And although this sounds obvious, it can be hard to remember in the headline rush of 13,000. You want to buy stocks when prices are low. The stock market is perhaps the only place where shoppers rush in when prices go up.
The Dow has climbed back slowly since its 2009 low of 6,547.05, and its other milestones have also generated a frenzy of attention. But as motivations for investment, their record has been mixed:
— On Oct. 14, 2009, about 10 years after the first time the Dow hit 10,000, the average hit the mark again. Traders passed around baseball caps labeled "Dow 10,000 2.0" on the floor of the New York Stock Exchange.
Mutual funds didn’t think the milestone was a good time to invest. They pulled $216 million out of U.S. stocks that day, according to TrimTabs Investment Research. A week later, the Dow was down about a half-percent. Three weeks after that, though, it was up 2.7 percent from its Oct. 14 close.
— On April 12, 2010, the Dow crossed 11,000. This time, the Dow climbed in the following week, up 0.8 percent. Three weeks after that, it was down 2 percent.
— On Feb. 1, 2011, the Dow crossed 12,000. A week later, it was up 1.6 percent. Three weeks after that, it was virtually flat.
Experts say investors should keep in mind that the surest way to profit in the stock market is to invest for the long term. Buying for just a week or a month at a time is a risky bet.
Besides, plenty of analysts say the Standard & Poor’s 500, given its much broader list of companies, is a better measure of the market. Although the Dow would need a 9 percent rally to reach its all-time high of 14,164.53, the S&P 500 is still 15 percent away.
It did close Friday at 1,365.74, a 3 1/2-year high and about 200 points from its all-time high in October 2007.Next Page >
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