Rallying like it is 1999

It may have just been a coincidence, but the Internet Bubble and the turn of the millennium made for the perfect celebration.  Prince had the theme song, and we all were 'partying like it was 1999.'  With the Dow up 22% YTD, the same seems to be true today, but this is a much different time.  Specifically, monetary policy makes this much different than back then, and it clouds the otherwise sound judgment of investors.  In this specific case, investors do not really know what they are buying sometimes, they are taking risks and making bets they should not, with the rationale that there is no other game in town.

The DJIA is up about 22% YTD, but when we take a closer look at the actual growth rate of the Dow something amazing comes to light, and this should cause investors to question the rally.  Using cumulative index and sector earnings calculators proprietary to clients of Stock Traders Daily, the table below shows  the true growth rate of the Dow Jones industrial average.  My focus here is on the DJIA, but calculator-based observations can be drawn for all sectors and markets (differing somewhat).

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2013

EPS

Growth

2013 Avg.

Q3

DOW

2.88%

2.61%

Q2

DOW

3.21%

 

Q1

DOW

1.75%

 
 

Revenue

Growth

2013 Avg.

Q3

DOW

0.80%

-0.73%

Q2

DOW

-1.30%

 

Q1

DOW

-1.68%

 

Importantly, this data is better than it really was because I included would-be EPS and Revenue improvements given the announced constituent changes this year, so I am being generous here.  The exclusion of Alcoa (NYSE:AA), Bank of America (NYSE:BAC), and Hewlett Packard (NYSE:HPQ) make the growth rate of the Dow Jones industrial average less bad than it otherwise would be, and the inclusion of Goldman Sachs (NYSE:GS), Nike (NYSE:NKE), and Visa (NYSE:V) also significantly improve the results. 

Some analysts are proclaiming that EPS and Revenue growth for the DJIA would be solid had these changes been made before 2013, but that simply is not true.   Quite the contrary, even with these material improvements the Dow has only realized 2.61% average EPS growth with a -0.73% revenue growth rate in 2013, and that does not support the 22% increase that has been realized.

I read a story the other day that suggested stimulus did not influence the stock market higher, but that is completely untrue.  The Dow Jones industrial average based on its growth rate has no business at these levels, and it is up here as a direct result of stimulus, and this makes some investors feel like partying like it was 1999 all over again.  Anyone tempted to join that party should take a close look at these growth rates, and determine for yourself if buying the market here is warranted given the huge discrepancy between the price appreciation of the DJIA and the actual growth rates, even with the favorable constituent adjustments I have provided here.  After you do, recall what happened after the party ended, because there may be more similarities left to come.

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