Tuesday, October 03, 2006

Dow's At a Record, Market's Not

A Forbes colleague asked today what I thought the odds were of the Dow hitting 13,000 by the end of 2007. Good question. There is always the chance that the bull market in large-cap stocks will continue, but I remain skeptical.

The Dow is at an all-time high, but as I keep pointing out, the stock market isn't. The Dow consists of 30 stocks. The market consists of thousands. Furthermore, if you dig into the Dow, things don't look so great. General Motors (GM), a money-losing company, is the best-performing stock so far this year. It's also the smallest-cap stock in the index. AT&T (T) and Merck (MRK), also somewhat troubled companies, are the second and third-best performers. Hewlett-Packard (HPQ), currently embroiled in controversy, is in the number 4 spot.

October just started and the Dow is already showing a gain for the month. But the S&P 500 and Nasdaq are down. In fact, despite today's rally, most of the broader market averages are down so far this month.

Here are some reasons why I remain cautious:

1) The housing downturn will probably be more severe than many economists expect.

2) OPEC will probably get serious about cutting production in order to keep energy prices from falling much lower.

3) Corporate profit growth has slowed in recent quarters and will likely keep slowing. Furthermore, much of the growth in recent quarters came from energy-related stocks. That story is probably over.

4) I'm not convinced the Fed has killed inflation.

5) The yield curve is extremely inverted between 6 months and 5 years, which tells me the economy will probably slow more than many expect.