Do psychological barriers matter to you in investing?
The Dow Jones Industrial Average is poised to climb, once again, to the psychologically important level of 10,000. 10,000 has been a memory since last October. As Brett Arends of the Wall Street Journal points out, we first crossed the 10,000 barrier over 10 years ago, and the dollar has lost 23% of its purchasing power in that time. What does Dow 10,000 mean?
Investor Sentiment
Another stroll past 10,000 in the Dow will make good headlines. Most likely many financial publications will pick up on the number since it is nice and round, and will sell papers (and get eyeballs online). Happiness at again crossing the 10,000 ‘barrier’ may even bring some people off the sideline and into the market. 10,000 is a number which doubles as a sentiment builder. As technical analysts like to point out, round numbers tend to be resistance points for markets. Not one to be drawn to that craft, I can still see why this round number resistance may make some sense.
Investor sentiment may actually already be improving, especially in global investments. Some mutual fund categories have seen major inflows in the recent past. Combined with outflows in money market funds, a turning point may have already been reached. Of course, the rally in US listed equities has been ongoing for months, but there is still lots of cash parked on the sidelines. Money market funds are still (even after the Reserve Fund’s ‘breaking the buck‘) safe investments, and a place investors will continue to park cash while their stomachs remain jumpy. Movement out of these funds is a sign this trend is changing.
What Does it Matter to You?
As Mr. Arend points out, rising prices hurt the inherent value of shares. Since shares are literally a share of future profits, the lower you get into a stock, the cheaper you paid for the piece of a company’s profit. Price to earnings ratios have increased to 17 times predicted future earnings and dividend yields have dropped to 2.1% in the overall domestic market. As the price moves up, stocks become less and less attractive.
How do you deal with psychological market points? Will Dow 10,000 bring you off the sidelines?
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