Wisdom Of The Dow

From an objective standpoint, many American corporations are in good health. Though global competition is fierce--which puts pressure on pricing power--American companies have done a good job cutting costs, increasing productivity, employing technology and extending economies of scale. As a result, profits are consistent while jobs and wages remain somewhat stagnant.

But this situation is hardly recent. Indeed, this scenario has been in place for several years. So what accounts for the recent record set by the Dow Jones Industrial Average?

The run-up is a reflection of subjective factors. Namely, that for the first time in years investors are feeling optimistic. Not just about interest rates, China or the trade deficit, but about the future of our nation.

The apparent groundswell of disdain for Republican politicians and policies has many in the investment world betting that our government will soon be in better hands.

As a former trader, I learned again and again that markets love stability and hate uncertainty. The more certain and predictable the geo-political landscape, the less risk that an unknown or unforeseeable event will thwart the profit prospects of corporations.

Only months after the collapse of the Internet bubble, stock markets were hammered again by the 9-11 attacks and they’ve been struggling to recover ever since. Not only because traders feared more attacks, but because our so-called leaders sped us into a war against a sovereign nation that had not attacked us. The Iraq war was expensive from the start and we went it alone, without a meaningful coalition and in spite of heavy protest from most of the rest of the world.

The Iraq war was a boon to the defense industry, but a disaster for stability and certainty. The war kept us in the bad graces of our trading partners, fomented global hatred and distrust, created political and social turmoil in the Middle East and raised the likelihood of further terrorism.

Moreover, the extreme ideological policies of the Bush Administration kept our nation divided, made sound fiscal policy a distant memory and put our treasury into almost unimaginable debt.

Now, with mid-term elections approaching, Republicans are getting hammered by any number of ethics scandals, the quagmire in Iraq and blowback from issues like social security and immigration. It looks likely that Democrats will take back at least one house of Congress.

Rising stock prices are telling us that the future looks better than it did six months ago. Rather than two more years of pork-barrel legislation at home, a failed policy in Iraq and silence as a negotiating strategy with Iran and North Korea, traders are re-evaluating their risk premiums and buying. They are betting that positive change is in the wind. And they are probably right.

Given that the housing market is contracting and interest rates are likely range-bound, the stock market is the smart place to be. Especially if the GOP lose their lock on power.

- JT Compton