Skip to main content

What does the rising Dow mean?

By Mark Thoma, Special to CNN
updated 9:00 AM EST, Thu March 7, 2013
STORY HIGHLIGHTS
  • Mark Thoma: The latest Dow number is not really a record when adjusted for inflation
  • Thoma: It's good that the stock market is doing well, but it's not a reliable predictor of economy
  • He says Federal Reserve's policy of quantitative easing has contributed to Dow's rise
  • Thoma: General optimism has also helped push the stock market up

Editor's note: Mark Thoma is a professor of economics at the University of Oregon.

(CNN) -- After reaching a record high of 14,253.77 on Tuesday, the Dow Jones industrial average rose an additional 0.3% on Wednesday to reach a new record high of 14,296.39.

First off, the latest Dow number is not really a record. If we adjust it for inflation, the Dow still has a way to go.

But is the rising number a sign that the economy, which has been improving sluggishly, is about to improve dramatically?

Mark Thoma
Mark Thoma

Probably not.

For example, the previous peak in the Dow in 2007 was just before the onset of the Great Recession, and remember what happened then? Right, the economy crashed. People got scared. Hell broke loose. No -- not really, but there was plenty of fear going around.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



Flash to present day. Some people are surprised that the stock market is doing so well, particularly in light of such high levels of unemployment. But maybe we should welcome the optimism since it can push along the economy.

The steady rise of the Dow since early 2009 has been driven mainly by two factors: the slow improvement in economic conditions and optimism since the recession ended, and the Federal Reserve's attempt to stimulate the economy using quantitative easing policies.

Under the policies, the Federal Reserve has purchased large volumes of financial assets, and the increase in demand for these assets from the Fed has lowered long-term interest rates and put upward pressure on the prices of stocks and bonds.

As asset prices increase, people feel wealthier and more secure because of increased value of retirement funds, education savings, and so on, and the increase in wealth and security makes it more likely that consumers will spend money on goods and services. This boosts GDP and employment, and the improved outlook for the economy can increase stock prices even further.

A case in point -- my parents. They are retired and did a lot of traveling. But when the 2007 recession hit and wiped out their retirement savings and equity in their home, they stopped traveling and instead began trying to rebuild what had been lost. They hunkered down, waiting for the storm to pass so to speak.

Gradually, they started to spend a bit more as stock prices and the economy improved, but they are not yet back to where they were before the recession.

My parents are more optimistic now, and that spurs them to spend more, which helps businesses and the economy. There are many Americans who went through similar experiences. If we add all of them together, we can see why things seem better than before. More people feel like we're on the right track. The high stock market prices reflect this sentiment.

But the real question remains: What does the Dow tells us about the future of the economy?

There is some evidence that the stock market can predict economic prospects, but the correlation is unreliable. The improvement in the Dow is a good sign, but let's not treat it as reading the tea leaves.

Just as no one can predict the stock market, no one can really predict the economy, even if the Dow is doing great.

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Mark Thoma.

ADVERTISEMENT
Part of complete coverage on
updated 9:05 AM EDT, Tue September 16, 2014
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
updated 7:49 AM EDT, Tue September 16, 2014
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
updated 1:23 PM EDT, Mon September 15, 2014
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
updated 3:38 PM EDT, Mon September 15, 2014
SEATTLE, WA - SEPTEMBER 04: NFL commissioner Roger Goodell walks the sidelines prior to the game between the Seattle Seahawks and the Green Bay Packers at CenturyLink Field on September 4, 2014 in Seattle, Washington. (Photo by Otto Greule Jr/Getty Images)
Martha Pease says the NFL commissioner shouldn't be judge and jury on player wrongdoing.
updated 9:15 AM EDT, Tue September 16, 2014
It's time for a much needed public reckoning over U.S. use of torture, argues Donald P. Gregg.
updated 8:25 AM EDT, Tue September 16, 2014
Peter Bergen says UK officials know the identity of the man who killed U.S. journalists and a British aid worker.
updated 7:28 AM EDT, Tue September 16, 2014
Joe Torre and Esta Soler say much has been achieved since a landmark anti-violence law was passed.
updated 4:55 PM EDT, Fri September 12, 2014
David Wheeler wonders: If Scotland votes to secede, can America take its place and rejoin England?
updated 8:41 AM EDT, Tue September 16, 2014
Jane Stoever: Society must grapple with a culture in which 1 in 3 teen girls and women suffer partner violence.
updated 4:36 PM EDT, Fri September 12, 2014
World-famous physicist Stephen Hawking recently said the world as we know it could be obliterated instantaneously. Meg Urry says fear not.
updated 6:11 PM EDT, Fri September 12, 2014
Bill Clinton's speech accepting the Democratic nomination for president in 1992 went through 22 drafts. But he always insisted on including a call to service.
updated 6:18 PM EDT, Fri September 12, 2014
Joe Amon asks: What turns a few cases of disease into thousands?
updated 1:21 PM EDT, Thu September 11, 2014
Sally Kohn says bombing ISIS will worsen instability in Iraq and strengthen radical ideology in terrorist groups.
updated 6:31 PM EDT, Tue September 16, 2014
Analysts weigh in on the president's plans for addressing the threat posed by the Islamic State of Iraq and Syria.
updated 9:27 AM EDT, Thu September 11, 2014
Artist Prune Nourry's project reinterprets the terracotta warriors in an exhibition about gender preference in China.
updated 9:36 AM EDT, Wed September 10, 2014
The Apple Watch is on its way. Jeff Yang asks: Are we ready to embrace wearables technology at last?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT