Dow’s New Record Raises Fear – NOT Optimism
Dow’s New Record Raises Fear – NOT Optimism by Gary Christenson – Deviant Investor
Guest Post from: Luis Aureliano
Regardless of whether it was Boeing or Apple’s latest positive earnings that pushed the Dow Jones Industrial Average (DJIA) above 22,000, this latest milestone is cause for concern – not optimism.
The index’s most precipitous decline in the last year was May’s dip of around -1.50%, and the blue-chip benchmark has only grown since then. This 8-year bull market, one of the longest in U.S. history, has shown no signs of stopping. However, its inertia only increases the likelihood of a correction, which is defined as a decline of more than 10.00%. At this point, the Dow would have to lose 2,200 points for the event to be termed as such – yet this notion is less far-fetched than many believe.
Sentiment Says It All
The biggest indicator of U.S. economic success, gross domestic product, advanced a reasonable 2.60% in the second quarter of this year, but those who take a broader view can see how mediocre this truly is. Average GDP growth in the 1960s was almost 5.00%, and in the 1990s it was 3.60%. Despite a clear downtrend, many prefer to bury their heads in the sand.
Sentiment seems to be in the driver’s seat when it comes to equity growth in the U.S., as there is little fundamental evidence for booming domestic expansion. Traditionally, good corporate earnings are not enough to sustain a rally of this size – and many believe that it is largely the growing global economy that continues to push U.S. stocks higher. Companies who are responsible for the Dow’s latest achievement, like Boeing and Caterpillar, receive most of their sales from abroad.
Development in emerging markets and low inflation has helped U.S. companies to export more, which pads the coffers but does little else. Additionally, many firms are taking advantage of low borrowing rates to fund inexpensive buybacks of their own stock, inflating the numbers further. As investors see that numbers are consistently in the green no matter their underlying value, they pile on for fear of missing out, despite a looming precipice.