The Independent Market Observer

3/6/13 – Hooray for a New Record?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Mar 6, 2013 11:49:57 AM

and tagged Market Updates

Leave a comment

Yesterday, the Dow Jones Industrial Average hit a new record, up from its previous all-time high in 2007. As I have mentioned before, new records are generally a sign of market strength, at least for a while, and can spur more buying as investors fear missing the boat.

Other supporting signs of market strength include new highs for the Dow Transports, the fact that the S&P 500 is less than 2 percent below its all-time high, and the general shift in narrative that I’ve discussed before, which also feeds off market gains.

As I said last month, the trend is clearly upward, and breaking the psychological barrier of previous highs should provide additional impetus. I wouldn’t want to bet against the stock market right now.

And yet, and yet . . . The first real caveat is that, in real terms, we’re not at a record at all. Stock prices are based on current dollars, which are worth less—thanks to inflation—than dollars were when previous records were set. In inflation-adjusted terms, the last record was in January 2000. Even though inflation has been low, over time it does erode the purchasing power of a dollar, so this isn’t just a theoretical or academic point. For the Dow to hit a real record, it would have to be over 16,000, up about 13 percent from yesterday.

Another caveat is that much of the gain was driven by a handful of stocks—IBM, Caterpillar, 3M, Chevron, and United Technologies. Because of the peculiarities of the Dow’s construction, higher-priced stocks make a bigger difference. As a capitalization-weighted index, the S&P 500 has its own quirks—namely, the higher the value of the company, the greater the weight. So Apple, for example, became more important as it got more valuable. As gains are concentrated in a handful of stocks, the index becomes less reliable as an indicator for the market as a whole.

There are positive factors as well. Index levels don’t account for dividends, and that offsets the inflation factor to a great degree. Conceivably, the Dow’s previous high now becomes a support level, making it harder for the index to decline.

Short term, the trend seems to be up. Longer term, earnings and valuation issues continue to lurk. We should know pretty soon whether the upward trend will continue or whether it’s time to take a break.

Technically, both indices remain well above their 50- and 200-day moving averages, and earnings continue to be projected to grow. Short-term valuations remain reasonable. I feel there is no apparent reason for a short-term decline.

Looking ahead, concerns remain. Longer-term value metrics show that the markets are overvalued. Historically, returns over three- to five-year periods from current longer-term valuations have been disappointing. In my view, there’s no real short-term reason to get out of the market at this point, but longer term, caution may still be appropriate.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®