Tuesday, March 5, 2013

The Dow Sets New High - What Does It Really Mean For the Economy?

Today the Dow Jones Industrial Average (DJIA) topped its previous record of four years ago. As of this writing the DJIA stands at 14,268 with little sign of retreating before the closing bell. While it may seem to be a time for those invested in the markets to rejoice it might also be prudent to take a look back at the whole economy for a bell weather instead of becoming myopic.

Financial indicators would suggest that even though the Dow is showing improvement over the last several months the actual benchmarks for guidelines that reveal a strong robust and recovering U.S. economy are giving us a different picture. If we take a look at where these benchmarks were the last time the Dow was lingering at this 14,000-plus mark the true state of the American economy becomes more than apparent.

The last time the Dow was hovering near today’s range the national average price for a gallon of regular gas was around $2.75. Today it is closer to $3.75. The unemployment rate was nearly 6.7 million, a figure that Obama opponents thought devastating. Today that number is closer to 13 million unemployed. It has basically doubled. The hot topic during this past election was the number of people now reliant on the food stamp program to sustain their families. The last time the Dow was over 14,000 those on food stamps numbered about 27 million. Today, it is closer to 48 million. A real tell for the state of the economy is the U.S. debt as a percentage of the Gross Domestic Product (GDP). Then it was about 38%, not great but acceptable. Today it lingers at around 74%, no government or country can continue to sustain that kind of number for long and expect to stay solvent. Also the GDP’s overall growth during the two periods were 2.5% and close to 2% respectfully. Speaking of debt. The nation’s deficit the first time around for this Dow number was $9 trillion. Obama and his administration promised to get that under control. Sadly, it has controlled them. Today the national deficit stands at over $16 trillion and is growing daily by the billions of dollars. These numbers seem useless to the common American striving to make a living so let me break it down to a number that hits the wallet of every American. The average American household debt the last time the Dow surged passed 14,000 was a ridiculous $13.5 trillion. Today it stands at a little under $13 trillion. It would seem to some that this is a step in the right direction and the Obama economic plan of spend and spend is finally working. What must be taken into consideration is that these numbers are not reflecting that they are affected by the fact that more families are out of work and no longer looking for jobs and subsisting on food stamps and other government programs to survive and are no longer counted in this particular statistic. If they were then it is likely that number would be closer to $15 trillion.

The rise of the Dow today, and hopefully tomorrow is a good sign, especially for those who invest in the market, big, small and mom and pop investors are going to benefit from this rise. However, in the face of this is the hard truth that consumer confidence is at its lowest point since President Obama took office over four years ago. It now stands at a declining 69.6%. Just four years ago it was an astronomical 99.5%. Ok, I agree that number was probably based on unrealistic hopes from voters, but a drop of 33% in just four years is a figure that must be understood and reckoned with by this current administration during its second term. It would appear that the American people are no longer confident in this President or this Congress’ ability to both come to terms with the reality of our economic situation or the brain power to fix it.

I want to close with two final statistics from the last time the Dow reached the heights of today’s reading. One is very telling and it is the S&P Rating of the United States. The last time the Dow was here this nation’s rating was AAA. Today that rating is AA+ and could be set for another lowered evaluation. The final number is for me the most telling because even though the number on the Dow is a record these following numbers tell us the real situation on Wall Street. The New York Stock Exchange LTM Daily Volume of sales during the first time the Dow surged over 14,000 was over 1 billion shares. Today that number is half at 545 million shares. The LTM, or Last Twelve Months (aka TTM-trailing twelve months) is a measurement used by investors to evaluate a company or stock’s financial health. Investors use the LTM to determine future spending in order to ensure some kind of beneficial financial gain. The higher the number of shares bought and sold during an LTM the bigger the supposed profitability for the investor. What the numbers show is that although the Dow has reached a new record setting benchmark real investors are still not that confident in the sustainability of the current economy.

We can celebrate this moment in financial history has a landmark, but be wise and use investing insight because as good as this one DJIA number looks today it isn’t supported by the overall economic picture. My personal credo is based on the long view - diversify, diversify, diversify, buy and hold, buy and hold, buy low and sell high.

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