Sibylline utterance

New high for Dow sends cryptic market message

The stock market rarely speaks clearly. Milestones such as Tuesday's record closing high for the Dow Jones industrial average are easy to spot. But like the pronouncements of ancient oracles, this one is open to contradictory interpretations.

To start with, as a narrow benchmark of 30 stocks weighted by share price rather than market value, the Dow is not very representative of the wider American market or the economy. And as a nominal metric, it is boosted by inflation. US equities will reach a more meaningful all-time high when the broader S&P 500 Index regains its 2000 peak, adjusted for inflation. To get there, it has to rise by approaching a third.

And stock performance of late has hardly been unequivocally for the record books. The S&P 500 is still down in inflation-adjusted terms from the previous real high more than a dozen years ago - even though the constituent companies' combined profit has increased by almost 40 per cent in real terms. Then again, shares have done quite well since the 2009 trough. The Dow, like the MSCI World index, has doubled in that time. Over the very long haul, the rewards have been about as expected. The S&P 500 has returned a real 3.3 per cent annually over the last 60 years.

Nor is it clear whether stocks are cheap or expensive. The price-to-current earnings ratio for the S&P 500 is well below bubbly levels - 18 times now, compared to 28 times in 2000, using numbers compiled by economist Robert Shiller. But today's PE ratio is almost exactly on the 60-year average. And if interest rates were not preternaturally low, corporate profits would probably be weaker - so the market could equally be seen as dangerously expensive, adjusted for more normal financial conditions.

Markets have no feelings, but traders and investors are an emotional lot. Are they cheerful or glum? The best answer is probably something like, "Yes, for now." The new high for the Dow shows that there's less fear about than in the darkest times - but there's more than in others. The same goes for greed, hope, caution and whatever else guides buying and selling decisions. Some investors and pundits may celebrate Tuesday's record but it's a milestone, not a signpost.