Rietz Comments On Dow's Flirtation With 13,000 Mark
The Dow’s week-long dalliance with the 13,000 mark failed to make an impact on the Friday lunch hour—or, for that matter, the life—of Jessica Campbell.
The 24-year-old was sitting in the downtown Des Moines Kaleidoscope with her feet kicked up and a book in her left hand.
“No, I have no idea,” she said. “I don’t follow the stock market.”
Never have? “No.”
Never will? “Probably not.”
Joe Burvee, of West Des Moines, said a rising stock market is probably a step in the right direction, but he also, “wasn’t aware of it.”
So that was that, for Campbell, Burvee, and probably millions of other Americans. The Dow Jones Industrial Average spent the week teasing investors by rising above and then falling below the symbolic 13,000 points, and much of the general public yawned.
In general, investors should be pleased. The Dow closed Friday at 12,983, the highest its been since May 2008, after spending most of the morning over 13,000 and surpassing the benchmark twice on Tuesday. The Standard & Poor’s 500-share index closed Friday at 1,365, its highest level since June 2008.
What do these numbers mean? The Dow’s number is calculated by dividing the stock prices of 30 very large companies by a number. The number is not 30, which was how the system worked in the early days. Like everything in finance, the truth is far more complicated now. The latest Dow “divisor” is something less than one and has nine decimal places, said Tom Rietz, a finance professor at the University of Iowa.
“Why whether anything divided by that particular number adds up to 13,000 matters to anybody, is a very good question,” he said.
But the Dow becomes a self-fulfilling prophecy, he said, because when people believe it matters, then, well, it does.
Rietz compares Dow benchmarks to the way weather forecasters say it will snow north of Interstate 80 but not south of it, or that it will be windy north of Highway 20 but not south of it. He always thinks to himself “weather patterns don’t follow highways,” he said, but the framework can still be useful.
“It works in some sense because it’s a handy benchmark that we learn to follow in our minds,” Rietz said. “13,000 rationally doesn’t mean anything, but if people attach meaning to it, then it matters.”
Over at the Principal Financial Group, there’s a customer service call center that gets busy when the market trends downward. When markets are up? Not so much.
“There’s a lot more psychological impact to downward movements in the market than upward thresholds being crossed,” said Barrie Christman, vice president of individual investor services for Principal. “The phones light up when the market is down.”
Even the reactions to discouraging market news have been muted by recent dramatic ups and downs, she said. Customers don’t like it when stocks drop, but they’re learning to live with the swings, and they’re less panicked by them, she said.
“The reaction has been less and less,” she said.
While 90 percent of customers’ investment balances have recovered their pre-recession value, the 2008 crisis has shaken investor confidence so profoundly, it’ll take more than 13,000 to restore investor confidence, she said. She thinks the change in attitude could last for a generation.
“I don’t take any particular comfort in a 13,000 mark,” Christman said.