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Don't expect any fireworks if the Dow Industrials break through all-time highs in the coming days.
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James Pisano's profile photo
 
The problem with the DOW is that it isn't an effective indicator of the whole health of the economy. It tracks the emotional value of the companies in the Index, and when those companies sit on their profits instead of re-investing them in their operations or growth due to their tax and regulatory burden not being clear five to ten years down the road, the emotional value of those companies increases over time.

Look at it from this perspective... When Sprint spent $20B on iPhone exclusivity in 2011 their stock took a significant hit. When companies spend significant capital or borrowed money they tend to see a corresponding dip in their stock price, especially when there isn't a definitive correlation between the expenditure and future profits. Because Sprint's network is not very reliable it was thought that Sprint's spending all that money on the iPhone wouldn't be such a great idea because who would want to move from AT&T's or Verizon's networks to Sprint's just for the newest iPhone?

The core of it, though, is the DOW and every other stock price tracked on Wall Street is based on the emotional stability of the people trading those stocks coupled with the activities of the companies that have issued said stock. If the companies sit on a bunch of money because they're afraid of what next year's tax law changes will mean to their bottom line, at some point, that money will have to be spent, so, realistically, buying may pay off. That is, of course, the saving of said money is prudent in terms of what their tax burden ends up being in the following year.

If the government wanted to make a significant positive impact, in real terms, to the economy, they would stop talking about changing the tax rates of anyone, and lock in what we've got now for at least the next five years. An even better positive impact; an impact that would prompt those businesses sitting on cash for a rainy day? Government would lower tax rates for the next five years with the caveat that if the economy improves as a result they would keep them at that rate for the following five years.

Imagine how much of the capital America's economy has been saving for a rainy day would start flowing into the private sector when businesses realize they don't have to worry about Washington DC messing up their bottom line for the next five years? Business plans speak in 5/10/15/20 year terms. Why can't DC?
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