The Dow Jones Industrial Average just broke 13,000. Go ahead: Call it psychologically important. Or a critical milestone.
Now, let this cop break up your party.
Dow 13,000 is cold comfort for the fact that U.S. stocks have disappointed for more than a decade. Investors have generally tuned out equity investing to focus on bonds, cash, and return of capital over return on capital. Consider: the Dow, while now having doubled off its financial-crisis low, remains well off its year-2007 high of 14,165, after earlier peaking in early 2000, when mid-teen-percent annual returns were our manifest destiny.
The 2000s went on to see the stock market have its worst decade since the Depression, capped off by an outright collapse in 2008 and the Dow visiting 1996 levels in the spring of 2009. Scores of investors vowed “never again,” and have since ignored stacks of brokerage statements and forgot their E*Trade (ETFC) log-ins. Investing blogger Eddy Elfenbein points out that if the Dow had merely kept pace with inflation over the last 12 years, it would be at 13,837 today.
Plus, the Dow would be even higher now — maybe by a thousand points, and even above its nominal all-time high — had its keepers had the foresight and common sense to include Apple (AAPL), the largest market capitalization in America, instead of, say, a laggard like Cisco (CSCO). But it wasn’t to be.
And so we have what we have.
While Dow 13,000 is certainly sound-bite worthy, the valuation of the broader Standard & Poor’s 500 Index tells a bigger story. That benchmark, which sports record earnings, is trading at its cheapest level ever compared with bonds, according to this analysis by Bloomberg News’s Whitley Kisling and Katia Porcezanski:
Profits that doubled since 2009 pushed the index’s so- called earnings yield to 7.1 percent, close to the highest on record when compared with the 10-year Treasury rate, according to data compiled by Bloomberg since 1962.
So what, say investors, who have pulled hundreds of billions out of stock funds to chase the returns of bond funds.
“Conditions are almost ideal for equity investors relative to all other investments,” Keith Wirtz, who oversees $14.6 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a Feb. 14 telephone interview. “The Fed’s keeping rates low for the foreseeable future to try to stimulate the environment for employee hiring and business activity. What does that mean for capital markets? Savers are not being rewarded.”
Could the confluence of Dow 13,000 and puny alternatives elsewhere finally bring investors back to the market? After all, since the end of 2008, $10,000 would have earned $184.60 in interest, based on the average monthly savings rate compiled by Bankrate.com. For Treasuries, the return was $1,644.
Meanwhile, U.S. stocks, quietly and with anything but fanfare, produced a total gain, dividends included, of $5,690.
So, on second thought, raise that toast to Dow 13,000. If you absolutely must.