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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Tuesday, January 10, 2006

The Dow Crosses 11,000! (So what?)

All CNBC could talk about yesterday was the Dow potentially crossing the "psychologically important 11,000 level". It did.

Big deal? Maybe. Yes, I do believe in Technical Analysis, or "TA" as it's called. I think it's a great tool, but only a tool. Without a hammer, a nail is useless, and vice versa.

So does it matter that the dow crossed 11,000? Not really. Over time, stocks go up. Look at a chart of the S&P 500 since 1980. If you were to make the chart span a longer timeframe, from say 1920, it looks pretty much the same (stockcharts doesn't go back that far!)

Why is that? Well, for one, the historical Return on Equity for US companies is around 11 or 12 percent. So it would make sense that the stock market returns that, right?

Will that continue? Who is to know? I would think it would, over time, barring any major macro changes.

In the meantime, let's not get so caught up on the Dow's current level and think more rationally. The market is headed higher. This is likely because companies should continue to profit in 2006, and more importantly they should make more than they did in '05.

But what about these people who talk about recession? Are we headed to recession? Of course, eventually, we will find ourselves in a recession. But, when will that be? '07? '08? '20?

In the meantime the Dow is headed higher. Good. It should. But don't get caught thinking that it means that 2006 is going to be another 2003, a year in which the S&P 500 gained 26%


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