Previous posts in this discussion:
PostUS Middle Class and the Dow (Istvan Simon, USA, 05/05/13 5:13 am)
Tor Guimaraes wrote on 2 May that I have provided "little evidence" that the economy and the middle class are doing just fine in the United States. This is simply not true. I supported my statements with statistical data published in a New York Times article which had extensive salary data on workers in the last 10 years. I frankly can't understand how that is "little evidence" in support of my position. Or why Tor thinks that the statistics and interpretations he provides are in any way "better" evidence in support of this.
As it happens, there is fresh new evidence just published in the New York Times about revised employment data, which caused a major mini-rally of the stock market on Friday (3 May):
I have to say that I consider Tor's May 2 contribution one of the worst that he has ever written on the economy for WAIS. This is just my opinion, and I welcome other divergent views. But with all due respect to Tor, how can anyone take seriously a post in which he wrote:
"How high the Dow goes means nothing for the return on investment in a particular stock. Only if one buys a Dow-based ETF would such statement make any sense."
The Dow is a broad indicator of the health of the overall state of the stock market. That is why it is collected and published. It is wrong to say that it has nothing to do with return on investment. Of course it has a lot to do with return on investment. First of all, one can buy derivatives which will give the exact return of the Dow. Second, one can buy the shares of the individual companies that make up the index. Third, when the Dow rises, a very large number of stocks which are not themselves part of the Dow rise as well. If what Tor wrote were anywhere near the truth, why would anyone bother about the Dow in the first place? This is pretty uncontroversial and basic stuff, so I see no point in arguing about it any further.
I will also not bother with a point-by-point rebuttal of Tor's post. Let me just say that I stand on my past record of correct predictions on the US economy, and I leave it for WAISers to decide for themselves whose interpretation they trust best. Since my post has implications about the future performance of the United States economy, the future will tell who is right.
JE comments: I've been monitoring my tiny investment portfolio for years, and I would argue for a middle ground on the Simon-Guimaraes polemic. The Dow is a good yardstick for the overall health of the market, yet it does not guarantee the performance of any individual stock. In the meantime, the Dow is at the doorstep of 15,000. I think that if it hits 16K anytime soon, Istvan will be the one proven right--although WAIS is about analysis and discussion, not proving who is "right" and "wrong."
My gut feeling is that we'll see a modest decline during the coming weeks. It may be time to "sell in May and go away..."
Stock Indices and the Economy
(Tor Guimaraes, USA
05/06/13 7:14 AM)
John Eipper's commentary on Istvan Simon's 5 May post included, "The Dow is a good yardstick for the overall health of the market, yet it does not guarantee the performance of any individual stock. In the meantime, the Dow is at the doorstep of 15,000. I think that if it hits 16K anytime soon, Istvan will be the one proven right."
Indeed, in general the Dow is a fairly good yardstick for the overall market (the S&P is significantly better), but Istvan originally was mistakenly linking the Dow to the US economy and the health of the US middle class. In my earlier post I explicitly recognized that the Dow might reach 16,000. However, if such Dow levels are achieved because of stock buybacks and other gimmicks stemming from too much cheap money with no productive investments, this is not good for the US economy in the long run.
Therefore, if John Eipper wishes to declare a winner, let it be based on something more beneficial to the American people, such as employment, personal income, or even GDP. Anything more directly related to the US economy and US middle class standard of living than the Dow Jones.
Meanwhile, instead of repeating the same mixed evidence from the Wall Street article, I would like to hear Istvan's rosy glasses explanation for "how it now takes two spouses working to equal the wages of a one-income family of 40 years ago." Also regarding "wages have plummeted so low that a two-income family is now (on average) 15% poorer than a one-income family of 40 years ago. Using the year 2000 as the numerical base from which to 'zero' all of the numbers, real wages peaked in 1970 at around $20/hour. Today the average worker makes $8.50/hour--more than 57% less than in 1970. And since the average wage directly determines the standard of living of our society, we can see that the average standard of living in the US has plummeted by over 57% over a span of 40 years." I would say that a standard of living measure is much more relevant to the economy and middle class living conditions than the Dow Jones.
JE comments: WAIS is not about picking winners, but I'll agree with Tor Guimaraes that the stock indices are only part of the economic picture. But are working-class families materially worse off than in 1970? Certainly they have far more stuff (cell phones, computers, several TVs...).
In his address yesterday at Adrian College, Senator Carl Levin stressed the need to distinguish between "principled stands" and "blind confidence" in the certainty of one's views. These words of wisdom for our graduates were an oblique reference to the gridlock going on in Washington, but I'll take them as sound advice for WAIS discussions, too.
A report on Sen. Levin's visit is forthcoming.