It’s Dow 12,000 That Matters

If and when the DJIA hits 11,000 it won’t matter much beyond being a round number. The Dow fell below 12,000 in June 2008 and below 10,000 in October of that same year. 11,000 was not around for long.

The real stability in the Dow and the period when individual and institutional investors made fortunes was between October 2006 and June 2008.  It will take a similar period with the DJIA above 12,000 for most people and firms to make back the hundreds of billions of dollars that they lost in the crash that bottomed last March.

The pieces are in place for the DJIA to hit 12,000 and to stay above that for some time.The P/E ratio of the S&P 500 stocks was around 20 from 2002 to 2008. As prices rose and profits fell, that PE number jumped to over 100 briefly and was over 60 for three quarters in late 2008 and 2009. Based on analysts forecasts, the P/E of the S&P has returned to its earlier levels. Earnings for most large companies are expected to recover this year and next as sales rise and expenses remain relatively low.

Stock prices are also being helped by the record amounts for cash which the biggest companies have on their balance sheets. When these amounts are backed out, P/E ratios on their actual operating figures fall sharply making share prices unusually cheap. As the companies pay out dividends and buy back shares, stock prices become even more attractive.

The economic recovery may indeed bring another long period of market prosperity. The DJIA has approached the 11,000 level and retreated several times over the last three months. It current assault failed yesterday. Perhaps the market is wary of admitting the economy is recovering. If stocks become overbought and GDP falters, the sell-off will be violent.

Millions of Americans have nest eggs and retirement funds that they had in 2006 and many institutional and mutual funds have asset bases well shy of where they were that same year. The market “recovery” is still a long way off.

Douglas A. McIntyre