Up, Up, and Away


Negative reviews of a movie can sound more perceptive, and stick in the memory longer, simply because they are negative. A similar bias is at work in the coverage of the stock market. As the Dow Jones Industrial Average hit and then surpassed its record, the bears were out in force. They pointed out that the Dow is still a bit below its peak when adjusted for inflation. They also pointed out that the S&P is below its peak and that Nasdaq is well below its. It’s all true, although, as Jeremy Siegel explained in the Wall Street Journal, it’s misleading. The S&P and Nasdaq peaks reflected an absurd overvaluation of tech stocks. (Leave them out, and the S&P is above its old peak.)

When the markets were going down, we rarely heard from the bulls. They had been discredited. But bears never are. There was “irrational exuberance” in the market, and especially in tech stocks, in the late 1990s. But when Alan Greenspan sounded a bearish note in 1996, warning about irrational exuberance, the Dow had closed at 6,437. Even during its slump, the market stayed well above that level. Robert Shiller, meanwhile, warned investors that they would lose money over the next decade. That’s not prescience; it’s just bad timing.

The market is doing well. Sound policy has helped. The long decline in inflation has resulted in a long, sustained drop in interest rates, pushing stock values up. Reductions in the taxation of capital over the last decade have also contributed to the market’s rise. But that rise reflects, most of all, the health of the economy. Inflation and unemployment are low, wages are growing, and even the deficit and gas prices are down.

It could all end tomorrow — although we doubt it will. Even if it does, the safest long-term bet in America is always with the bulls.