Yesterday marked an important milestone for the most famous stock market index in the world – the Dow Jones Industrial Average or simply the Dow. There is little “industrial” in the Dow’s components these days, but we cannot ignore the milestone – it reached and closed 30,000 points for the first time in history.
There are plenty of things to say about this performance. Also, the timing is more than interesting, as it does so during a pandemic. However, history will record the fact that the Dow reached 30,000 in November 2020, doubling in less than four years.
Stock Market Prices Lead Economic Recovery
The performance is and should be celebrated around the world. While many economists, traders and investors alike worry about inflation and the “artificial” reasons that made the Dow Jones reaching 30,000, the truth is always in the middle.
Yes, inflation worries exist. When all central banks in the world print money at unprecedented rates the prices will inflation. However, that is not the case yet. All inflation measures are still tilted to the downside. One argument here is that when inflation jumps, it does it so fast that the central banks cannot react.
I would argue here with the following. Central banks are so tired of fighting low inflation for decades (e.g. Japan), that such a “surprise” is at least welcome to change the overall monetary policy mix.
Coming back to the Dow, the stock market is viewed as a leading economic indicator. It leads the business cycle by about six months. If that is true, there is a stunning coincidence between the moment the Dow and the stock market turned during the pandemic and the timing of the announcement of potentially effective vaccines.
Moreover, higher stock market prices are responsible for generating the famous “wealth effect”. Investors feel more optimists and wealthy and thus consumption increases. As a result, the higher stock prices lead to a faster economic recovery.
It took Dow Jones 103 years to reach 10,000 points. Over a century! However, the next 10,000 points were reached in 18 years. How about the trip from 20,000 to 30,000? It traveled that distance in four (4!) years. And, at the same time, inflation is nowhere to be seen. In other words, stock market investors benefited the most from the higher stock market prices. As economists like to say, the increase was in real terms.
Long live the stock market! Long live the Dow!