The Dow Jones Industrial Average crossed the 40,000 mark in intraday trading on Thursday, May 16, 2024. On Friday, the index closed above 40,000 for the first time ever.

There are a lot of assets and indexes that are hitting all-time highs in terms of dollars.  Perhaps the Dow breaking the 40,000 mark is representative of the major asset bubble of our time.

It is interesting to note that the Nikkei 225 index hit an all-time high earlier this year, also breaking the 40,000 mark briefly.  This was perhaps more notable because it surpassed its high that it hit back in 1989.  It put “buy and hold” at a whole new level.  Apparently, you just have to hold your stock index fund for 35 years and you will make some money.

The difference with the Dow is that it has never seen these levels before.  And going back in time, it was nowhere close.

In 1999, a book was published with the title Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market”.  The problem for the book is that it came out just before the stock market crash that began in early 2000.  Even though it was worse for the tech bubble and the Nasdaq, it hit all major U.S. indexes.  The book was predicting this milestone in the next few years (from 1999).

Perhaps the problem with the book is predicting a specific number with a timeframe.  If the authors had made the Dow 36,000 prediction with a 30-year time horizon, they would have been correct.

The reason that stocks tend to always go up over time is because of inflation.  You can always depend on the central bank to create more new money out of thin air.  This is what ultimately drives the market.  There will always been winners and losers in terms of individual companies and their share prices.  But as a whole, the market going up in the long run is mostly a result of monetary inflation.

This is difficult for people to understand, although investors typically understand that a loose monetary policy tends to be good for stocks.  If we lived in a world with little or no monetary inflation, then stocks as a whole would generally not go up.  Some would go up, and others would go down.

People would still invest in stocks because they would pay dividends.  Also, in a world of little monetary inflation, consumer prices would tend to go down as productivity increases.  You could hold stocks, make money off dividends, plus see the purchasing power of your money increase.  Who cares about capital gains if you are getting wealthier in real terms?

Dow History

Let’s go back to the market lows in 2009 after the financial crisis had hit in 2008.  The Dow closed on March 9, 2009 at 6,547.

In other words, in the timespan of about 15 years, the Dow has gone up over six-fold what it was at its low.  How does an entire index go up over 6 times what it was in the matter of 15 years?

Are these companies really worth 6 times more than they were just a decade and a half ago?  Apparently, investors are saying that they are.  Are these companies so much more profitable than they were?

This massive rise is due primarily to monetary policy.  Perhaps the low in 2009 overshot what it should have.  Just as a bubble goes past what is seemingly rational, the same can happen with a bust.

Still, that is an incredible rise in such a short time.  You could point to the Fed’s balance sheet, as it shows that it has increased about 8-fold from where it was in early 2008 to where it is today.

While consumer prices have certainly gone up beyond the Fed’s 2% annual target, overall consumer prices have not risen 6-fold like the Dow.  They haven’t even close to doubled in that 15-year timespan according to the Bureau of Labor Statistics.

This just shows that we have a major asset bubble.  The Dow at 40,000 is symbolic of this Everything Bubble.

It probably won’t get to 50,000 without a major correction first.  We have had an inverted yield curve for well over a year now.  The financial media barely talk about this now.  With price inflation still stubbornly above 2%, it makes it difficult for the Fed to aggressively loosen its monetary policy.

I don’t think we are going back to Dow 6,500.  If it got that bad, the Fed would probably go crazy again with its digital money printing.  I can’t discount a 50% or more crash.  Dow 20,000 seems crazy right now.  But Dow 40,000 seemed crazy when it was at 6,500 in 2009.