Watching the stock market’s swings

Wall Street Journal markets editor extraordinaire (and personal friend) Emma Moody tweeted Tuesday morning: “Please, please just let this death-by-1000-ticks saga be over…” Her link to the story “Stock Futures Track Global Markets Higher” was quickly replaced as the Dow climbed to a record close.

Let’s take a look at some of the coverage of this milestone. Here’s the WSJ closing bell story:

The Dow Jones Industrial Average surged to its highest closing level ever, finally overcoming the losses tied to the financial crisis on the back of a tenacious stock rally that began in March 2009. And the blue chips did it with an exclamation point—a 125.95-point blast that left the old record in the dust.

“It really does represent an achievement that we have climbed out of this crater,” said Jack Ablin, chief investment officer at Chicago’s BMO Private Bank, which manages about $66 billion.

The Dow advanced 0.9% to 14253.77 Tuesday to top its previous high of 14164.53, set in October 2007. Stocks plunged in the wake of the financial crisis, with the benchmark bottoming at 6547.05 on March 9, 2009.

The Standard & Poor’s 500-stock index rose 14.59 points, or 1%, to 1539.79 Tuesday. The Nasdaq Composite Index added 42.10 points, or 1.3%, to 3224.13.

The New York Times story expresses well some of the surprise surrounding the recent bull market’s stock surges.

Of course, a few things have happened since October 2007. The housing market collapsed, the financial system went into meltdown, the European Union started to fray and politicians dragged the United States through an on-off-on-again fiscal imbroglio.

 But stocks managed to move beyond all that.

 Since a low point in March 2009, the Dow Jones index has more than doubled, stunning even the most seasoned stock market watchers. It closed at 14,253.77 Tuesday.

 “What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm. “We think this could be the biggest bull market of our careers.”

On Tuesday in particular, leading indexes abroad rose after the Chinese government announced that it would step up spending and European data showed that retail sales there have been stronger than expected.

After the bell sounded at the New York Stock Exchange, stocks were pushed up even more after a reading on the service sector in the United States showed that it had risen to its highest level of activity in a year, surprising analysts.

Bloomberg’s story had some interesting perspective and facts about the recent gains.

The bull market in U.S. equities enters its fifth year this month. The S&P 500 has surged 128 percent from a 12-year low in 2009 as companies reported better-than-estimated earnings and the Federal Reserve embarked on three rounds of bond purchases to stimulate the economy.

U.S. stock indexes advanced this week amid optimism the Fed will maintain stimulus measures to support the economic recovery. Fed Vice Chairman Janet Yellen said yesterday the U.S. central bank should press on with $85 billion in monthly bond buying while tracking possible costs and risks from the unprecedented program.

Global equities also rose today as China pledged to support economic expansion. The nation will keep its growth target at 7.5 percent for this year and plans a 10 percent jump in fiscal spending, the government said during the start of the National People’s Congress today.

The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which covers about 90 percent of the economy, rose to 56 in February from the prior month’s 55.2, the Tempe, Arizona-based group said today. Readings above 50 signal expansion. The ISM services survey covers industries ranging from utilities and retailing to housing, health care and finance.

Then there are the sidebars to the coverage to consider. NPR’s Planet Money had an interesting piece saying the Dow didn’t actually hit a record since the returns haven’t been adjusted for inflation, a fair point.

Just a quick, cranky reminder: Despite what you may have read, the Dow Jones Industrial Average did not hit a new high today in any meaningful sense.

After adjusting for inflation, the Dow was higher in 2000 than it is today. It was also higher in 2007. It would need to rise another 10 percent or so to hit an all time high in real (i.e. inflation-adjusted) terms.

When reporting on other numbers that change over time, it’s routine to adjust for inflation. So when people talk about wages stagnating for American households, it means that, after you adjust for inflation, the median wage is roughly the same as it was 15 years ago. If you didn’t adjust for inflation, you would say the median wage has risen by more than 40 percent over the past 15 years. But that would be a meaningless statement.

It’s equally meaningless for the Dow. And even if the Dow did hit a real, inflation-adjusted, all time high, it wouldn’t mean much anyway.

There are other, less arbitrary indexes of the U.S. stock market, such as the S&P 500, which tracks 500 (rather than just 30) big U.S. companies. The S&P 500, for what it’s worth, is below it’s all-time highs in both nominal and inflation-adjusted terms.

Then there are the poor people who fail to remember the mantra, “Buy low. Sell high.” According to WSJ, rising markets cause more people to pile in. Exactly the opposite of what everyone says you should do.

The Dow Jones Industrial Average is back in record territory, and now everyone wants a piece of the action.

Stockbrokers say clients are phoning in orders. Mutual-fund data show investors buying U.S.-stock funds, which they had fled for years.

This is classic investor behavior. History shows that investors typically get excited and jump into stocks when indexes are hitting records. They also tend to sell when indexes are down, which means they sell low and buy high. No wonder they have so much trouble matching index gains.

In all but one of the past six bull markets, investor purchases of stock mutual funds picked up right after the Dow’s first new record, according to Ned Davis Research. In the six months after that first record, the median flow of money into stock funds, in percentage terms, was three times as strong as in the six months before.

A bull market is commonly defined as a gain of 20% or more from a low, and it ends when stocks decline 20% or more from a high. The current bull market began in March 2009.

Unfortunately, bull markets tend to be getting long in the tooth by the time they hit record territory. There were exceptions, but the median bull market had less than two years to go after that first record.

Come on, people. Do you really think Warren Buffett is buying stocks now? It is interesting that the Dow has risen to a non-adjusted record, but this last story with its sad facts about investor behavior is the most compelling to me.