Something magical happened Tuesday. The Dow Jones Industrial average closed at a new all-time high of 14,253…eclipsing its previous closing high of 14,164 set nearly five and a half years ago. What a feat.
Wall Street cheered. Jim Cramer pumped his fist. Then, right when it seemed the day couldn’t possibly go any more favorably, Venezuelan President Hugo Chavez up and croaked. We had to pinch ourselves twice to make sure this had all just really happened.
Unquestionably, these sorts of disjointed combinations salt and pepper the world in ways we never could’ve imagined. Would it have been possible to plan a better day upon rising in the morning? Perhaps, yes. Though, it wouldn’t have been nearly as random or satisfying.
Nonetheless, we pledge not to do so today. Instead, we’ll reset our sites and take aim at the new bull market in stocks. Like a magic act or a mirage, upon second glance, it’s hardly what it first seems…
The New Bull Market
There’s nothing like a new bull market to capture the imaginations of men and propel their heads into the clouds. Up there, among the moist vapors, the thin air and hopes for easy riches snuff out even the brightest of minds. Yet not all bull markets produce the same dizzying effects…
A bull market in gold, for instance, is no fun at all. Financial talk show hosts groan and moan over it. Mutual fund brokers find every chance to knock it. The big banks lever up and short it. Central bankers do everything they can to suppress it. Even the true gold bugs grunt and grimace…fearing this could be the final paper money crackup they’ve been warning of.
As bull market’s go, a residential real estate bull is much more attractive. Every man becomes a Donald Trump. They line up Saturday mornings to buy condos before they’re built…so they can flip their way to riches. Hot shot developers blot the landscape of the outer reaches of suburbia with eye lacerating monstrosities, which encroach upon rudimentary dairy farms and their hair curling aromas. What’s more, people mortgage their lives away to buy them.
Still, when it comes down to it, a bull market in stocks brings forth the most awesome and ridiculous behaviors. For what’s not to love about rising stock prices?
They make a man feel wiser, richer, younger, and better looking all at once. Suddenly his bald spot’s no longer getting bigger…it’s getting smaller, along with his waist line. Conversely, his 401k statement’s no longer getting smaller…it’s getting bigger. Upon opening his monthly statement, he’s greeted with the pleasing satisfaction of ballooning wealth. He fancies his shrewd investing abilities to equal Warren Buffett – maybe even superior.
Obviously, rising stock prices solve all problems and hide all failings. Yet, before we throw caution to the wind, we must take a moment to review what this new bull market’s all about…
On the Good and Proper Way to Celebrate the New Bull Market
The Dow closed yesterday at 14,329…a new all-time high for the third day in a row. In nominal terms, that’s 165 points higher than its former high set on October 9, 2007. That means that over the last five and one half years, the Dow’s returned 1.15 percent.
So if you’d invested $10,000 on October 9, 2007, yesterday you would’ve had $10,115 sitting in your brokerage account – not including dividends. But that’s just in nominal terms, not real – inflation adjusted – terms.
Apples must be compared to apples. According to the Bureau of Labor Statistics’ inflation calculator a dollar today has the purchasing power that $0.90 had in 2007…a loss of 10 percent.
So in inflation adjusted terms, you get a negative real return of 8.85 percent. That initial $10,000, while it now shows up as $10,115 in your monthly statement, is only worth $9,103 in year 2007 purchasing power. So to really be a new bull market, and overcome inflation, the Dow must reach 15,738.
Will it get there? No one knows for sure. But we do know that Federal Reserve Chairman Ben Bernanke has placed an $85 billion per month bet that it will.
Therefore, as stocks approach a new bull market, we want you to be prepared to celebrate it in a good and proper way. Our recommendation is to celebrate it the way a designated driver celebrates at the company holiday party…
That is, up close, in person…but as a spectator not a participant.
You’ll wake up the next morning with a clear mind and a clear conscience. Moreover, you’ll retain the hilarious memories of your boss’s tipsy wife spilling the beans – plus her cookies – and mail room Joe and receptionist Julie behaving like jack and jenny asses.
You will thank us for sure.
for Economic Prism