The Dow Jones Industrial Average has never been higher. On Tuesday, after a run-up of 125 points, the index of 30 blue chip companies closed at 14,253, beating the record close set in October 2007. Wind back those five-plus years, and you’ll recall we were on the verge of a global financial collapse and the worst recession since the Depression.
So what are we to make of crossing this line? Especially if you believe it's not industrial behemoths like Alcoa, General Electric, and Procter & Gamble – all component companies in the Dow – that are the economic engines of our future but tech companies like Apple, Google and Facebook. What’s a tech investor, or even an employee of a tech company, to do?
Invest in tech, says Kevin Landis, president of Firsthand Capital Management, a mutual fund company, with $300 million under management. Landis’ largest holdings are Apple, Amazon, Google and Facebook. On the secondary market, he’s also purchased a chunk of still privately held Twitter.
“I think of the Dow as possessing what I would call psychological incumbency; it’s probably that simple as to why it’s followed so closely,” Landis says. “But as an active investor, I am glad people follow it. I do better in a world where people look at the wrong things.”
That Wall Street was celebrating the Dow on Tuesday, and not the tech-heavy Nasdaq, is a function of how ridiculously expensive tech companies were back in the bubble days of 2000 when the Nasdaq hit a record 5,049. On Tuesday it closed at 3,220. Nowhere near a record, but higher than it’s been in 12 years.
By most measures tech stocks are still relatively cheap, and some of the most important tech companies are either still private (Twitter); newly public (Facebook); or not listed on a U.S. exchange (Samsung). The company that was driving performance on the Nasdaq, Apple, has taken a beating in recent months. So you are left with Google and Amazon carrying the tech banner in the stock market. Both companies have been on a tear over the past year, but you can see why it’s the Dow, not the Nasdaq, that hit a record.
Not that the Nasdaq hasn’t been on its own upward trajectory. If you look at both the Dow and the Nasdaq from the beginning of 2009, the depth of the financial crisis, both indices have zoomed an almost identical 115 percent. So if you are worrying that somehow the Dow’s primacy indicates that tech isn’t the future of our economy, calm yourself, says Ross Levine, an economist at the University of California, Berkeley, whose research focuses on the linkage between the financial system and the real economy.
“What I see is a slow emergence from the financial crisis. I see the Fed maintaining extremely low interest rates, and people become steadily more confident about the economy overall,” Levine says. “The future of the U.S. economy is in high tech, high value-added, high human capital endeavors. I see nothing that has happened in the last few months, including Wall Street’s self-congratulatory view of the Dow reaching a record, that would alter that perspective.”
The big structural changes that we have been seeing in the U.S. economy since the 1980s with the emergence of the personal computer and the internet haven’t been altered, Levine says. Nasdaq 5,000 was an aberration, a detour in the ongoing storyline of technology. “So if we crossing some imaginary line that has existed for a very long time, and doesn’t mean very much,” Levine says. “If people want to celebrate that, well, all I can say is – mazel tov.”
