The Dow Jones passed yet another record last night, this time closing at 13,089. That’s 135 points up on the day, 626 points up on the year and a staggering 1038 points up on the year low, set on 5th March.
It has taken the index just six months to jump 1,000 points; it broke through 12,000 on October 19th. In contrast, the index took seven years to move from 11,000 to 12,000, although in the mid nineties it doubled in value in less than four years – moving from 5,000 on November 21st 1995 to 10,000 on March 29th 1999.
Yesterday there were good results from Boeing, ConocoPhillips and Pepsi that helped to boost the index. Also, surging profits at Intel (up 19 percent), and better than expected performances from big banks including Citigroup and JPMorgan Chase Co (which helped ease fears over the US sub-prime crisis hitting profits), all helped give the bulls reason to stamp and holler with glee.
According to Bloomberg, 19 of the Dow’s 30 members have announced their results so far in the Q1 reporting round, and, on average, profits have been up 18.4 percent. And while shares have been rising, they have not been keeping pace with the jump in profits, so that the average ratio between stated profits and market valuations, or historical pe, is now 17.7, against 22.5 last October when the index powered through the 12,000 barrier.
And yet the Dow run comes at a time of doubt.
The US economy is limping. The latest piece of official data – the so-called beige book – painted a slightly more rosy picture than had been expected. With it describing inflation and growth as moderate, speculation that the Fed will be lowering rates soon was encouraged, but even so doubts linger. The last data on the property market has shown only a mild improvement in new homes after February’s abysmal figures. In fact, sales of new homes were 23 percent down on March 2006, and the second worst month (after February 2007) since 2001.
Capital Economics has taken various economic indicators and concluded that GDP growth slowed to a mere 1.5 percent in the first quarter, and will slow by even more in the next period.
But then again, the Dow has been helped by the falling dollar. According to Bloomberg, 41 percent of 2006 revenue enjoyed by the companies making up the Dow came from overseas. The US might be suffering, but the rest of the world isn’t, and that’s good news twice over for the big US exporters. It’s good because the markets the US sells to are booming; it’s good because the weak US economy is pulling down the dollar.
But if one was to cast the net wider than just the Dow, and look instead at the SP 500, things are nowhere near as impressive. This index still hasn’t passed the previous high set in 2000, and this despite 14 quarters that have seen average profit growth in double figures. But moving forward, it is thought average profit growth of SP companies will be much more modest, with Thomson Financial estimating overall first-quarter earnings growth of about seven percent, slightly better than expected, but well down on previous quarters.
Then there is the NASDAQ. At 2547, this index still hasn’t managed to reach half the level of 5132 seen on March 10th 2000.
In the past, stock market crashes seemed to come ahead of economic recessions. They were a sign of things to come. It seems more likely than not that the US will avoid recession this year – Alan Greenspan puts the chances at a third – but it is undeniable that the US economic machine is set to splutter. And yet the markets just keep on rising.
Is this a sign that corporate America is less reliant on Mr and Mrs American consumer, and is instead more in tune with the global economy, or is it a sign of irrational investors?
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