Few Clouds 29° Good Evening
Few Clouds 29° Good Evening

Experts: Dow milestone, sluggish economy make sense

A financial professional works the phones on the

A financial professional works the phones on the floor of the New York Stock Exchange at the end of the trading day April 12, 2010. The Dow Jones average closed above 11,000 for the first time since the financial crisis gripped the nation's economy. Photo Credit: Getty Images

At first glance, it may seem counterintuitive that the Dow Jones industrial average has broken 11,000, even as unemployment remains high and other economic indicators stay sluggish.

But experts say it makes perfect sense. First, the stock market is not a reflection of what the economy is doing now, and second, it's still got a long way to go to make it back to its previous high of 14,164.50 in October 2007.

"The market tends to be more predictive than reactive," said Steve Dolvin, a finance professor at Butler University in Indiana. "You buy a stock because of the earnings it's going to give you, not the earnings it did give you."

So if the market is going up in the midst of an apparently stagnant economy, that could be a sign that better times are coming, Dolvin said. Indeed, he said economic data showed that technology ordering and other indicators of economic activity bottomed out in April 2009 - and that's right after the stock market turned around.

Despite the rise in the market in the past year, it still hasn't completely recovered.

"When you look at where the market is relative to where it was a couple of years ago, it's still quite a bit lower," said David Ely, a finance professor at San Diego State University.

That's an indication that investors are still "not wildly optimistic," but more so than they were before, he said. The relatively low number of traders in the market during its rise is another indication of that, he said.

"We've passed the bottom and things will move up," Ely said. Also, as the market improves, it will attract investors who had been scared away by the crash, and that could drive stocks higher still.

Dolvin said the market rise makes sense, given that technology ordering and other manufacturing data indicate that economic production is increasing.

There are times, though, when the market's activity is just a mystery.

"Sometimes the market has its own mind," he said.

More news