The Dow Jones Industrial Average (hereafter simply called the Dow) is a weighted average of the stock prices of 30 U.S. corporations, including the likes of Apple, Goldman Sachs, Merck, Verizon and Walmart. The Dow index, which originated in 1896, is calculated and reported every second of every business day, and it is often used as a proxy for the value of the entire U.S. stock market. The companies comprising the Dow have changed over the years, whenever those companies were absorbed, or went into decline, or went bankrupt. (Eastman Kodak was a component of the Dow from 1930 to 2004.) This means that the Dow is at best a proxy for successful U.S. businesses, not your average U.S. business.
Stock traders and financial writers like to talk about the Dow’s milestones, i.e., the dates when the Dow reached various values that end in multiple zeroes. For instance, the Dow first hit 100 in 1906; 200 in 1927; 500 in 1956; 1000 in 1972; 2000 in 1987; 5000 in 1995; 10,000 in 1999; and 20,000 in 2017. The index doubles, on average, every 13 to 14 years, reflecting ever-increasing corporate profits and U.S. dollar inflation.
Today, the Dow stands at 29,398, just 602 points (2%) shy of 30,000, another oft-cited milestone among financial finaglers. One of the most infamous calls for “Dow 30,000” was made in a 2001 book by Robert Zuccaro, CFA. Had Zuccaro’s prediction come true, the Dow would have reached 30,000 in 2008. Needless to say, that did not take place — but only because Donald Trump was not president then. It is safe to say that, thanks to Trump’s business tax cuts and his various money-ass-kissing executive actions, the Dow will now breach that magic 30,000 mark very soon, maybe within days.
You will be sure to hear about it the moment it happens. The news will eclipse reports of the 80,000th coronavirus victim and the 50,000th square mile of Australia lost to flames, Fox News will make sure of that. One can already buy Trump-red baseball caps embossed with Dow 30,000, along with Dow 30,000 Trump T-Shirts in children’s sizes. Even I did not expect such pre-marketing of the event by right-wing business interests.
Trump boasts about record-high stock prices, equating them with robust economic health, and he naturally wants us to make the same reckoning. He hypes the value of our 401k’s as if they embody America’s lifeblood, when in fact “almost half of working-age families have nothing saved in retirement accounts.” But what if you do have retirement savings? Shouldn’t you be crowing along with Trump?
I have several points to make in this regard, starting with the irony of Trump citing the Dow Jones Industrial Average as a measure of Americans’ well-being, when only a third of the companies in the Dow provide U.S. manufacturing jobs.* Be that as it may, corporate and individual investors alike should be pleased if stock prices rise at a sustainable rate, because that means that their risk has been duly rewarded. But when the stock market gets juiced for political purposes, as Trump has done, savers should be wary.
Right now, U.S. stock prices are about 20% higher (see the sidebar for the current figure) than the long-term trend would suggest. Eventually, the market will regress to the mean and that 20% premium will evaporate. It could happen this year, or next year, or in 2025. But it is sure to happen, and the current Trump Blip will be seen for what it was.
Adding to my wariness is the fact that stock market investors are now paying $25 a share for every $1 of company profits. This 25:1 ratio is near historic levels — in modern times, investors have been willing to pay this much only during the 1990’s dot-com bubble and the 2000’s real estate bubble. (The long-term ratio is 15:1.) But speculators, like Trump, don’t really care about value as long as there is the prospect of short-term gains.
Fact is, the Dow (and all the other stock averages) have been inflated by wealth inequality. Whereas ordinary price and wage inflation have largely been contained, thanks to cheap imported goods made by exploited overseas labor (and with special thanks to automation and outsourcing), stock prices have been bid up by the million one-percenter households who need some place to park all those tax-cut windfalls sloshing their way. After all, there are only so many estates one can buy and private jets one can fly, and the rich folks know that low-interest-rate bonds are what winners sell to losers.
Don’t get me wrong, I don’t want stock markets to crash or workers’ retirement savings to be crushed. Just pointing out that when Trump tweets about Dow 30,000 (and he will) and how he made it happen (which he probably did), the most you can credit him with is blowing bubbles.
* Of the 30 DJIA companies, those with U.S. manufacturing sites are 3M, Boeing, Caterpillar, Dow, Merck, Pfizer, Johnson & Johnson, Proctor & Gamble and United Technologies. If one were to include fossil fuel producers, then one can add ExxonMobil and Chevron to the list. The only Apple product assembled in the U.S. (Texas) is the Mac Pro. Nike has no U.S. manufacturing. McDonalds manufactures hamburgers. Coca-Cola manufactures the syrup that washes them down. The rest of the DJIA comprises finance, retail, health services, information tech and communications.