“The Dow reached 20,000 today!” shouted voices from across Wall Street in late January 2017.
Although the percentage of Americans who could describe the purpose of the Dow Jones Industrial Average is probably in the single digits, the entire country was celebrating when the index reached this milestone.
Stocks show how confident investors are in a company’s potential growth without regard to the real-life effects of over-dependence of these measures as indicative of the economy’s health.
We saw this “expectation” of growth or decline of a company go wrong during the dot-com boom when several internet companies saw their earnings skyrocket into the billions despite having made little to no money. What better way is there to get rich than to play on the idiocy of men with fat wallets and small brains?
Some crackpot could decide that AOL was going to make a comeback and buy up every stock available. What does this do? This artificially increases demand for shares in the company, which then increases the price of the stock.
The public knows that AOL is so ten years ago, but to investors and to Wall Street, AOL is on the rise.
The stock market only encourages companies to use sketchy methods to increase their stock prices while doing very little to increase long-term growth. Many times over, struggling companies have laid off thousands of workers, only to see their stock prices increase. Why? Because their expenditures decrease in the short-term and they can earn more for investors.
How is this telling of the strength of the American economy? Unemployment to raise the value of the theoretical well-doing of a company is cruel and shortsighted.
Simply put, the Dow Jones is an index of how well the stock market is doing. Note: stock market, not the economy. And even the Dow as an index really sucks.
It does its calculations based on 30 of the best stocks in the market. Thirty. Of the best. Not only does the Dow represent only 29 percent of the market, but it represents an optimistic 29 percent. This is inaccuracy at its finest.
The Dow is also price-weighted, meaning that it will go up or down based on how the price of each stock increases or decreases. However, this change will mean different things depending on the company. A one dollar decrease for General Electric is a 3.3 percent change in its stock price. A one dollar decrease for Goldman Sachs is a 0.4 percent change in its stock price.
The Dow treats these changes the same way, but a 3.3 percent drop versus a 0.4 percent drop is incredibly significant in terms of stock price. This method of calculation is laughably idiotic and almost as ridiculous as the border wall. But Americans always have loved stupid ideas.
Why is 20,000 such a milestone? Probably because it is a nice-looking number. But over the years, every milestone that has been reached has been a precursor to impending economic disaster.
In 1929, the Dow reached 300 and then quickly lost 89 percent of its value after the Wall Street Crash and subsequent Great Depression of the early 1930s.
In 1972, shortly after Nixon was re-elected, the Dow hit 1,000 only for it to crash in 1973 due to many economic crises. It did not reach that peak for another 10 years.
In late 2007, the Dow peaked just above 14,000 only for it to come crashing down during the 2007 financial crisis where it lost over 50 percent of its value.
And now we have reached 20,000. The excitement is building up for this “everlasting, upward slope.” Slowly, but surely, the Dow’s value is rising higher than ever before.
As much as we would like to dream, the Dow cannot defy gravity. What goes up must always come down.