But despite the widespread boredom in editorial suites–hey, don’t you know there’s a war on?–the five-digit Dow marks a psychic and symbolic breakthrough. So rather than slight this event and worry about where the Dow is going next–which is, of course, unknowable–let’s step back and look at the big picture. Which is that the bull market, which began on Aug. 12, 1982, with the Dow Jones industrial average at 776.92, has been a formative event–if not the formative event–for most Americans under 40. We’ve had a Depression Generation and a World War II Generation. Think of today’s thirtysomethings-and-under as the Bull Market Generation. Before 1982, stock investing was almost an exotic art, restricted to a relative handful of sophisticates and risk takers. Now it’s commonplace. Back then, people relied mostly on corporate pensions and Social Security to finance their retirement. Now people rely heavily on retirement plans they manage themselves, and Social Security is in such trouble that politicians are (idiotically) thinking of trying to use the stock market to bail it out.
Consider the irony. In the late 1970s and early 1980s, when both stock and bond prices were depressed and put corporate pension funds so far underwater they needed submarines, businesses began changing from giving employees “defined benefit” pensions that guarantee fixed payments to offering “defined contribution” plans in which employees’ skill (or luck) at investing determine whether they retire on cat food or caviar. Thanks, Corporate America. This change set off a flood of retirement money into stocks, which is the major factor in running up stock prices. The market has produced an unimaginable amount of wealth–the U.S. stock market is worth about $13 trillion these days, up from about $1 trillion in 1982, according to Wilshire Associates. The increase–call it $12 trillion–works out to more than $40,000 for every man, woman and child in the United States. Yes, the wealth isn’t spread evenly, with a relative handful of high-income types owning most of it. And some U.S. stocks are owned by foreigners. But the wealth sloshing around, courtesy of the market, is astounding.
The stock market has had a big impact on the real world. Higher-than-expected tax revenues from people cashing in stock-market gains have allowed states to balance their budgets and let the federal government claim to be running a budget surplus for the first time in 30 years. Much of the high-tech boom is due to the stock market–and much of the market boom is due to high-tech companies. Here’s how it works. At high-tech companies, stock options are a common form of payment. As a result, America’s best and brightest settle for relatively low salaries, because options give them a shot at big money. At Microsoft, for instance, employees have made far more in stock-option profits, realized and unrealized, than Microsoft has paid them in salary. Sounds impossible, but it’s totally true. So not only has Microsoft helped power the stock market, but the market has helped power Microsoft by acting as its best recruiting tool. And Microsoft is a microcosm of high tech. The higher stock prices climb, the more eager people are to work for options rather than cash salaries.
The bull market has created its own set of idols. People like Berkshire Hathaway’s Warren Buffett (a director of NEWSWEEK’s parent The Washington Post Company), Microsoft’s Bill Gates and General Electric’s Jack Welch have become folk heroes for their investment prowess, personal fortune and shareholder wealth creation, respectively. Buffett, in particular, has achieved cult status. So much so that when Berkshire holds its annual stockholder meeting in Omaha next month, it will rent two arenas to hold the thousands of shareholders who trek to Nebraska to hear the Word of Warren from the lips of the Prophet Himself.
There’s nothing wrong with respecting the likes of Buffett, Gates and Welch. But stocks have so permeated American society that permanent double-digit investment returns are taken as a given and thousands of people are abandoning traditional careers to set themselves up as day traders. You have to wonder when the music will stop. As some of us Grinch types keep pointing out, this market is priced very high by traditional valuation standards, and is starting to feel very fragile. While the Dow and the Standard & Poor’s 500 have set record after record, much of the market is well down from its highs. Even the S&P, a far bigger sample than the 30-stock Dow, owes much of its rise to a mere two dozen-or-so issues. Many others have gotten clobbered.
A brief history lesson would be helpful here. When the bull market started, pessimism permeated the United States. Japan, which has been in the dumper for a decade now, was the hot market. Its industries and stock market were thriving; the United States seemed permanently blighted. Stocks were well below their mid-1960s prices. Gloom reigned. American interest rates were in double digits–10-year Treasury bonds were about 13 percent, compared with about 5.5 percent now; banks’ prime lending rate was 14.5 percent, double today’s level; home mortgages were 16 percent–if you could get one.
Just as most people then expected bad times to continue indefinitely, people now expect today’s good times to continue indefinitely. Stocks have risen so fast for so long–up almost 1,200 percent in the 16-plus years of the bull market–that “buying on dips” has become an article of faith. Contrast this generation’s experience with what happened to those of us starting out in the 1960s. From Feb. 9, 1966, when the Dow first crossed 1000 (it closed at 995), through Dec. 17, 1982, when it broke 1000 permanently, the Dow went nowhere, and took some horrific dives along the way. This period lasted about as long as the current bull market has–and taught an entirely different lesson. Now people know–or think they know–that stocks only go up. In the ’60s, ’70s and early ’80s, the lesson was that stocks went down–or, if you were lucky, sideways. The moral: nothing good–or bad–lasts forever. Even as we celebrate Dow 10,000, let’s remember that markets really go down sometimes and stay down for years. And let’s also remember, when we hear talk that this boom, unlike others, will go on forever, that the four words most dangerous to your wealth are, “This time, it’s different.”
