Skip to main content

What does the rising Dow mean?

By Mark Thoma, Special to CNN
March 7, 2013 -- Updated 1400 GMT (2200 HKT)
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
December 27, 2014 -- Updated 0127 GMT (0927 HKT)
The ability to manipulate media and technology has increasingly become a critical strategic resource, says Jeff Yang.
December 26, 2014 -- Updated 1617 GMT (0017 HKT)
Today's politicians should follow Ronald Reagan's advice and invest in science, research and development, Fareed Zakaria says.
December 26, 2014 -- Updated 1319 GMT (2119 HKT)
Artificial intelligence does not need to be malevolent to be catastrophically dangerous to humanity, writes Greg Scoblete.
December 26, 2014 -- Updated 1505 GMT (2305 HKT)
Historian Douglas Brinkley says a showing of Sony's film in Austin helped keep the city weird -- and spotlighted the heroes who stood up for free expression
December 26, 2014 -- Updated 1303 GMT (2103 HKT)
Tanya Odom that by calling only on women at his press conference, the President made clear why women and people of color should be more visible in boardrooms and conferences
December 26, 2014 -- Updated 1312 GMT (2112 HKT)
When oil spills happen, researchers are faced with the difficult choice of whether to use chemical dispersants, authors say
December 25, 2014 -- Updated 0633 GMT (1433 HKT)
Danny Cevallos says the legislature didn't have to get involved in regulating how people greet each other
December 23, 2014 -- Updated 2312 GMT (0712 HKT)
Marc Harrold suggests a way to move forward after the deaths of NYPD officers Wenjian Liu and Rafael Ramos.
December 24, 2014 -- Updated 1336 GMT (2136 HKT)
Simon Moya-Smith says Mah-hi-vist Goodblanket, who was killed by law enforcement officers, deserves justice.
December 24, 2014 -- Updated 1914 GMT (0314 HKT)
Val Lauder says that for 1,700 years, people have been debating when, and how, to celebrate Christmas
December 23, 2014 -- Updated 2027 GMT (0427 HKT)
Raphael Sperry says architects should change their ethics code to ban involvement in designing torture chambers
December 24, 2014 -- Updated 0335 GMT (1135 HKT)
Paul Callan says Sony is right to call for blocking the tweeting of private emails stolen by hackers
December 23, 2014 -- Updated 1257 GMT (2057 HKT)
As Christmas arrives, eyes turn naturally toward Bethlehem. But have we got our history of Christmas right? Jay Parini explores.
December 23, 2014 -- Updated 0429 GMT (1229 HKT)
The late Joe Cocker somehow found himself among the rock 'n' roll aristocracy who showed up in Woodstock to help administer a collective blessing upon a generation.
December 23, 2014 -- Updated 2115 GMT (0515 HKT)
History may not judge Obama kindly on Syria or even Iraq. But for a lame duck president, he seems to have quacking left to do, says Aaron Miller.
December 23, 2014 -- Updated 1811 GMT (0211 HKT)
Terrorism and WMD -- it's easy to understand why these consistently make the headlines. But small arms can be devastating too, says Rachel Stohl.
December 22, 2014 -- Updated 1808 GMT (0208 HKT)
Ever since "Bridge-gate" threatened to derail Chris Christie's chances for 2016, Jeb Bush has been hinting he might run. Julian Zelizer looks at why he could win.
December 20, 2014 -- Updated 1853 GMT (0253 HKT)
New York's decision to ban hydraulic fracturing was more about politics than good environmental policy, argues Jeremy Carl.
December 20, 2014 -- Updated 2019 GMT (0419 HKT)
On perhaps this year's most compelling drama, the credits have yet to roll. But we still need to learn some cyber lessons to protect America, suggest John McCain.
December 22, 2014 -- Updated 2239 GMT (0639 HKT)
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
December 20, 2014 -- Updated 0112 GMT (0912 HKT)
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
December 19, 2014 -- Updated 1709 GMT (0109 HKT)
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
December 18, 2014 -- Updated 2345 GMT (0745 HKT)
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
December 19, 2014 -- Updated 2134 GMT (0534 HKT)
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
ADVERTISEMENT