Wednesday, March 6, 2013

What the Dow record means for you

The Dow Jones industrial average just set a record high. Feel rich yet?

With the economic recovery still lumbering along, you could be forgiven for scratching your head rather than tossing confetti. But the journey to a new high took more than five years, starting just before the financial crisis and the Great Recession, and it's a milestone that matters to tens of millions of Americans.

Three big questions about the Dow?s big day:

1. Have I missed the boat?

Yes and no.

The market surge began in the thick of the recession. And it?s been one for the history books. The Dow?s closing low was 6,547.05 on March 9, 2009, which means that if you?ve kept your cash out of stocks, you?ve missed a double-your-money rally and then some.

If you?ve been too skittish to jump back in, you?ve got company. Investors have pulled more money out of stock mutual funds than they have put in every year since the Dow?s last peak in 2007.

Only this January, when the market was near a five-year high, did they start consistently putting money in, according to data from the Investment Company Institute, which tracks so-called fund flows.

The good news: Money managers say the market still has room to run.

?If you look for those things that tell you it?s too late ? signals that say the end of the bull market is close, the end of the economic recovery is close ? the answer is we don?t have those signals,? said Hugh Johnson, chief investment officer and chief economist at Hugh Johnson Advisers, an asset management company in Albany, N.Y.

Among other factors, Johnson says he?s encouraged by the so-called index of leading economic indicators, which points to a sluggish but still growing economy.

And since the market?s most recent rally began last June, he points out, stocks that generally hold more risk, like companies whose fortunes rise and fall with the economy, have performed better than safer stocks, like utilities.

And because corporate profits keep rising, stocks are still reasonably priced by historical standards. Investment experts often judge whether stocks are cheap or expensive by comparing the prices to how much money the companies are earning.

?We get good news after good news for companies,? CNBC?s Jim Cramer said Tuesday. ?How do you get people to get out of stocks when Qualcomm gives you great news or Google? Google is making a lot of money. All they seem to do is get stronger.?

Some market experts say it?s better to wait for a slight pullback in the market, then get in.

?We now believe we are at the first of three market pivot points this year and suspect a drop is now likely to unfold over the next several months,? Craig W. Johnson and Leah Williams of the investment bank Piper Jaffray said in a market analysis. Such a drop, they said, could be ?the single-best buying opportunity this year.?

2. Isn?t all this just about the fortunes of Wall Street itself ? the 1 percent?

Not if you have a 401(k) plan, an IRA or any other retirement account tied to the stock market.

Index funds, which track the major market indexes stock-for-stock, have soared in popularity over the past two decades because they carry extremely low fees and leave less to the success or failure of money managers.

The most popular of these funds track the Standard & Poor?s 500 index, which hasn?t quite beaten its record but has logged an even more impressive rally since 2009 than the Dow. It?s up 127 percent.

Something else to consider is what?s known as the wealth effect, the idea that people are more comfortable spending money when they feel wealthier. Headlines about the stock market?s record run only help.

?Consumer spending is not what it should be ? a 2 percent growth rate, and it should be closer to 3 ? but it?s getting better,? Johnson says. ?It tends to feed on itself. It makes people feel better.?

3. So why don?t I feel wealthier?

Because you?re not ? at least not judging by the other statistics that are close to Americans? pocketbooks, and certainly not compared with the boom years of the mid-2000s.

Household income in the United States, measured by what the median family makes and adjusted for inflation, has fallen every year since 2007, according to the Census Bureau.

The figure for 2011, the most recent year for which data are available, was $50,054, about $4,400 less than at the peak.

Home values ? the biggest source of wealth for most Americans ? have been on a tear, but it?s going to take them a lot longer than it took the stock market to recover the ground they lost during the crash and recession.

Home prices in January were almost 10 percent higher than a year ago, the data analysis company CoreLogic said Tuesday, and they rose in every state but Delaware and Illinois.

But home prices are still 26 percent below their peak, in April 2006. And that?s to say nothing of a 7.9 percent unemployment rate. And gas prices marching steadily higher. And never-ending budget squabbles in Washington.

On top of all that, unless your boss was feeling holiday cheer and gave you an end-of-the-year raise, your paycheck is a little smaller than it was at the end of last year.

That?s because Washington allowed a two-year cut in the payroll tax, which pays for Social Security, to expire. The cut was 2 percentage points, so if you pull in $50,000 a year, your paycheck is shrinking by $1,000, or about $40 every two-week pay period.

So it?s worth keeping the good times on Wall Street in perspective.

?I think we expect too much out of the market,? Nicolas Colas, chief market strategist for Convergex Group, a technology company that serves investment advisers and hedge funds, told CNBC. ?We expect it to be the central litmus test for social welfare. Really, it?s just a measure of corporate profitability.?

One other reason to buy stocks: They?re the only game in town. Other places that looked like surer bets aren?t so sure anymore.

The yield on the 10-year U.S. Treasury note, what the government will pay you every year to lend it money, is below 2 percent. As recently as 2006, it was above 5 percent.

Warren Buffett ? preacher of the buy-and-hold stock strategy, so-called Oracle of Omaha and probably the most famous investor in America ? told CNBC earlier this week that stocks are still cheaper than other forms of investment.

?Anything I bought at $80, I don?t like as well at $100,? he said. ?They?re not as cheap as they were four years ago, but you get more for your money.?

Source: http://www.nbcnews.com/business/economywatch/what-dow-record-means-you-1C8701252

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