Something remarkable took place on Tuesday. The Dow Jones Industrial Average achieved an unprecedented closing figure of 14,253, surpassing its previous record of 14,164 set almost five and a half years ago. What a remarkable achievement!
Wall Street erupted in cheers. Jim Cramer was seen celebrating with enthusiasm. Just when it appeared that the day couldn’t get any better, Venezuelan President Hugo Chavez sadly passed away. We had to pinch ourselves, ensuring that this astonishing day was real.
These unexpected events often blend into our lives in ways we could never forecast. Would it have been possible to orchestrate a better day upon waking up? Perhaps, but it wouldn’t have carried the same delightful unpredictability.
While we generally avoid celebrating the deceased as it may seem inappropriate, we sometimes make exceptions. There was one occasion and another to highlight our human tendency to err.
However, today we choose a different path. Let’s refocus our celebrations on the emergence of a new bull market for stocks. At first glance, it may seem almost magical or illusory, but a closer look reveals deeper truths.
The New Bull Market
A new bull market ignites excitement and stirs imaginations, lifting hopes and dreams to great heights. Amid the clouds, aspirations for quick wealth can cloud even the sharpest minds. Yet not every bull market induces the same euphoric response…
Consider, for example, a bull market in gold. Such scenarios often lead to groans from financial analysts and skepticism from mutual fund brokers. Major banks tend to short it, and central banks work tirelessly to undermine its value. Even the most ardent gold enthusiasts might be apprehensive, worrying this could signal the impending collapse of paper currency they’ve long anticipated.
Conversely, a bull market in residential real estate is far more enticing. People start acting like magnates, keen to buy properties before they’ve even been constructed, with hopes of flipping them for profit. Ambitious developers flood suburban areas with visually striking high-rises, often at the expense of quaint local farms. Many individuals end up mortgaging their futures to invest in these properties.
Yet without a doubt, a bull market in stocks produces the most striking and sometimes absurd behaviors. After all, who doesn’t appreciate rising stock prices?
They bring a sense of invigoration, making individuals feel wiser, wealthier, younger, and more attractive all at once. Suddenly, a receding hairline appears less noticeable, and one’s waistline seems to shrink. Meanwhile, his 401(k) balance begins to swell, offering him the illusion of investment prowess akin to Warren Buffett—perhaps even more skillful.
Rising stock prices can mask a multitude of shortcomings and offer easy solutions to complex problems. However, before we indulge in celebration, it’s essential to reflect on what this new bull market truly encompasses…
On the Good and Proper Way to Celebrate the New Bull Market
As of yesterday, the Dow closed at 14,329, marking a fresh all-time high for the third consecutive day. In purely nominal terms, this represents an increase of 165 points over its previous peak recorded on October 9, 2007. This translates to an overall growth of just 1.15 percent over the past five and a half years.
If you invested $10,000 on October 9, 2007, you would now find $10,115 in your brokerage account—excluding dividends, of course. Yet, this number is nominal and fails to account for inflation.
True comparisons require consideration of inflation rates. According to the Bureau of Labor Statistics’ inflation calculator, today’s dollar holds a purchasing power equivalent to $0.90 in 2007, reflecting a loss of 10 percent.
Thus, in inflation-adjusted terms, you would have experienced a negative real return of 8.85 percent. Your original $10,000 investment, although showing $10,115 today, is only equivalent to about $9,103 in 2007’s purchasing power. For the Dow to genuinely be in a bull market and effectively counter inflation, it must reach 15,738.
Will it achieve this milestone? That remains uncertain. However, we can confidently state that Federal Reserve Chairman Ben Bernanke has wagered $85 billion monthly that it will.
As we navigate this new bull market, it’s vital to prepare for a celebration that is both meaningful and appropriate. Our suggestion is to honor this market in a way akin to a designated driver at a company holiday event…
Enjoy it from the sidelines—actively engaged but without direct involvement. This approach will ensure you wake up the next day with clarity and peace of mind. Plus, you’ll retain those entertaining memories: your boss’s wife spilling secrets—along with her snacks—and the humorous antics of Joe from the mailroom and Julie the receptionist.
Come morning, you’ll surely appreciate our advice.
Sincerely,
MN Gordon
for Economic Prism
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