The ‘Market’ Hits a New Low

Another headline that misses the point…

The Dow Jones Industrial Average (DJIA) hit a new low yesterday and now is about 47% off its October 2007 high. To many casual observers the DJIA is “the market.” In reality, it is simply an index of 30 stocks considered by the Dow Jones company (publishers of the Wall Street Journal and now a part of News Corp.) to be “blue chips.” It is also a price weighted index which means the stock with the highest absolute price (IBM right now) will have the biggest single impact on the movement of the index. The index now also contains a large number of “fallen” blue chips (General Motors, Citibank, Bank of America, General Electric), which probably would not be selected as members of the index if a vote were taken right now. The index also contains a large number of highly-cyclical industrial stocks (MMM, Caterpillar, Boeing, Home Depot, United Technologies) whose fortunes are closely linked to the economy.

Most professional investors consider the S&P 500 (which is market cap weighted) to be a better representation of “the market.” Not that it’s much consolation, but the S&P 500 is still 5% above its November 20, 2008 low. Clearly the market (however one defines it) is feeling stress right now. I doubt that this week’s action has much to do with the economy – we have seen little in the way of new economic data that would drive down the market (January retail sales, for example, were actually better than expected). The only new news for the market has been the government’s stimulus plan, the new bank rescue plan and the new plan to help distressed home owners. I’m not suggesting that these items are the reason the market has been down this week, but the correlation is there. Perhaps the market was looking for something different (better?) from the government. Perhaps investors are worried that the plans come with political agendas that may not be totally focused on helping our capitalist economy. Perhaps the Madoff and Stanford scandals have tainted the entire investment industry with a stain that will be hard to remove. Perhaps everyone is just tired.

Regardless of the reasons for this week’s decline, it feels very much like capitulation. I know that I’ve said this many times before, but it’s been true many times before – I have truly felt waves of capitulation over the last six months. The fact that this feeling of capitulation was not the absolute bottom does not change in my mind or the way it felt. There is $9 trillion on the sidelines in money market funds. We are seeing some very early signs of economic improvement (higher shipping rates, a recovery in base metal prices, inflows into the stock and bond mutual funds in January, etc.) and I remain hopeful that the market will soon begin to respond to the expectation that the recession will eventually end. It is starting to feel like the market (and many investors) cannot believe it ever will.