Beware the wobbly stocks ladder
T o much acclaim, the Dow Jones Industrial Average recently passed the 14,000-point mark for the first time in five years, a supposed signal that the economy is back on track.
A few days later, the Commerce Department reported — unexpectedly — that the nation's Gross Domestic Product had contracted by 0.1 percent in the fourth quarter of last year, a signal that all might not be well.
The move into stocks that boosted the Dow has been led by financial institutions purchasing stock mutual funds. In contrast, individual investors have merely dipped their toes into direct purchases of individual stocks.
Yet, financial news media have commented ecstatically on rising stock markets — some even forecasting that the slow-growth aftermath of the Great Recession finally is over. As a result, individuals who, for the past five years have been trying to repair their broken balance sheets, may be tempted by stellar gains in equities to think of participating more aggressively in stocks.
My advice: Be very careful.
Why? Mainly because little or no account is being taken of inflation. Most commentators dismiss inflation as virtually non-existent right now. Admittedly, another recession appears the bigger risk facing the economy.
The Bureau of Labor Statistics oversees the calculation of the Consumer Price Index (CPI) and reports that inflation has been hovering at below 2 percent over the past five years. Consumers buying food, goods and services such as health care in the real world, know better. They likely would agree as more accurate some higher private assessments — including those by John Williams' Shadow Government Statistics newsletter — of a more realistic inflation rate of between 6 percent and 10 percent.
The fact is, taking the average low inflation rate of the CPI since 2007, the Dow index now would have to be around 15,469 today to equate to its record high of 14,165 set on Oct. 9, 2007.
A number of factors can create an overly optimistic picture of the economy and the stock market. One is this unrealistically low rate of inflation, and another is the exclusion of the effect of enormous repurchases of their own shares by big corporations. Purchases of so-called “treasury stock” raise earnings per share, support the price of a company's shares and decrease the number of its shares in the marketplace, helping to further increase share prices.
All the while, the Federal Reserve continues to inject more synthetic dollars into the system with its campaign of bond purchases.
Some economists believe stock markets have risen too fast. According to Capital Economics, the increase in stock prices over the past 12 months (+16.8 percent) is third behind the Eurozone (+18.6 percent) and Japan (+28.6 percent).
Media commentators contend that investment by individuals is a bearish sign. Robert Hapanowicz, a financial adviser with H&A Wealth Advisors in Pittsburgh, points in a recent report to an increase of individual investment in stock mutual funds as proof of rising stocks. However, this activity is reflected as institutional buying, not individual or “retail” purchases.
Profit potential from stocks certainly remains tempting. Only when retail investors start to buy individual stocks directly does history suggest a market downturn is on the horizon.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Pens’ Dupuis out at least a month with lower-body injury
- Steelers’ Bryant returns from drug suspension, ‘won’t happen again’
- Starkey: Searage, Pirates ultra-confident
- New Steelers kicker Boswell ready for challenge at Heinz
- Husband, wife die in apparent murder-suicide in Baldwin Borough
- Authorities identify McKeesport man whose body was found in Yough River
- Pa. Gov. Wolf pushes ‘broad-based tax increase’ to avoid $2B deficit
- Allegheny Township home destroyed by fire
- Maddon, Hurdle are the models for modern major-league managers
- Penn State THON organizers to review ‘canning’ safety
- Audit: Pennsylvania’s education master plan is 16 years out of date