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
August 26, 2014 -- Updated 2242 GMT (0642 HKT)
Former ambassador to Syria Robert Ford says the West should be helping moderates in the Syrian armed opposition end the al-Assad regime and form a government to focus on driving ISIS out
August 27, 2014 -- Updated 1321 GMT (2121 HKT)
Ruben Navarrette says a great country does not deport thousands of vulnerable, unaccompanied minors who fled in fear for their lives
August 27, 2014 -- Updated 1319 GMT (2119 HKT)
Robert McIntyre says Congress is the culprit for letting Burger King pay lower taxes after merging with Tim Hortons.
August 26, 2014 -- Updated 2335 GMT (0735 HKT)
Wesley Clark says the U.S. can offer support to its Islamic friends in the region most threatened by ISIS, but it can't fight their war
August 27, 2014 -- Updated 1126 GMT (1926 HKT)
Jeff Yang says the tech sector's diversity numbers are embarrassing and the big players need to do more.
August 26, 2014 -- Updated 2053 GMT (0453 HKT)
America's painful struggle with racism has often brought great satisfaction to the country's rivals, critics, and foes. The killing of Michael Brown and its tumultuous aftermath has been a bonanza.
August 26, 2014 -- Updated 2019 GMT (0419 HKT)
Ed Bark says in this Emmy year, broadcasters CBS, ABC and PBS can all say they matched or exceeded HBO. These days that's no small feat
August 26, 2014 -- Updated 1919 GMT (0319 HKT)
Rick Martin says the death of Robin Williams brought back memories of his own battle facing down depression as a young man
August 26, 2014 -- Updated 1558 GMT (2358 HKT)
David Perry asks: What's the best way for police officers to handle people with psychiatric disabilities?
August 25, 2014 -- Updated 1950 GMT (0350 HKT)
Julian Zelizer says it's not crazy to think Mitt Romney would be able to end up at the top of the GOP ticket in 2016
August 25, 2014 -- Updated 2052 GMT (0452 HKT)
Roxanne Jones and her girlfriends would cheer from the sidelines for the boys playing Little League. But they really wanted to play. Now Mo'ne Davis shows the world that girls really can throw.
August 25, 2014 -- Updated 1629 GMT (0029 HKT)
Peter Bergen and Emily Schneider say a YouTube video apparently posted by ISIS seems to show that the group has a surveillance drone, highlighting a new reality: Terrorist groups have technology once only used by states
August 25, 2014 -- Updated 2104 GMT (0504 HKT)
Kimberly Norwood is a black mom who lives in an affluent neighborhood not far from Ferguson, but she has the same fears for her children as people in that troubled town do
August 22, 2014 -- Updated 2145 GMT (0545 HKT)
It apparently has worked for France, say Peter Bergen and Emily Schneider, but carries uncomfortable risks. When it comes to kidnappings, nations face grim options.
August 26, 2014 -- Updated 1727 GMT (0127 HKT)
John Bare says the Ice Bucket Challenge signals a new kind of activism and peer-to-peer fund-raising.
August 22, 2014 -- Updated 1231 GMT (2031 HKT)
James Dawes says calling ISIS evil over and over again could very well make it harder to stop them.
August 24, 2014 -- Updated 0105 GMT (0905 HKT)
As the inquiry into the shooting of Michael Brown continues, critics question the prosecutor's impartiality.
August 22, 2014 -- Updated 2247 GMT (0647 HKT)
Newt Gingrich says it's troubling that a vicious group like ISIS can recruit so many young men from Britain.
August 21, 2014 -- Updated 1450 GMT (2250 HKT)
David Weinberger says Twitter and other social networks have been vested with a responsibility, and a trust, they did not ask for.
August 22, 2014 -- Updated 1103 GMT (1903 HKT)
John Inazu says the slogan "We are Ferguson" is meant to express empathy and solidarity. It's not true: Not all of us live in those circumstances. But we all made them.
August 22, 2014 -- Updated 1223 GMT (2023 HKT)
Retired Lt. Gen. Mark Hertling says he learned that the territory ISIS wants to control is amazingly complex.
August 20, 2014 -- Updated 1951 GMT (0351 HKT)
Cerue Garlo says Liberia is desperate for help amid a Ebola outbreak that has touched every aspect of life.
August 21, 2014 -- Updated 1742 GMT (0142 HKT)
Eric Liu says Republicans who want to restrict voting may win now, but the party will suffer in the long term.
August 21, 2014 -- Updated 1538 GMT (2338 HKT)
Jay Parini: Jesus, Pope and now researchers agree: Wealth decreases our ability to sympathize with the poor.
August 21, 2014 -- Updated 1200 GMT (2000 HKT)
Judy Melinek offers a medical examiner's perspective on what happens when police kill people like Michael Brown.
August 19, 2014 -- Updated 2203 GMT (0603 HKT)
It used to be billy clubs, fire hoses and snarling German shepherds. Now it's armored personnel carriers and flash-bang grenades, writes Kara Dansky.
August 20, 2014 -- Updated 1727 GMT (0127 HKT)
Maria Haberfeld: People who are unfamiliar with police work can reasonably ask, why was an unarmed man shot so many times, and why was deadly force used at all?
ADVERTISEMENT