10,000 Tops?

The Lehmann Letter ©

The stock market had a nasty setback today as it struggles to break clear of the 10,000-on-the-Dow benchmark.

It’s an important struggle for two reasons.

First, we made our initial visit to Dow-10,000 a decade ago – at the end of the 1990s. Today the stock market is no higher than it was then. In the meantime there have been two peaks well over 10,000 and two troughs well under 10,000, but no upward trend. Are we stuck in a range?

Second, the September 17th posting of this blog discussed the favorable impact of – and the reasons for - today’s high profit margins. That posting went on to say: “Improved profit margins will be very good for earnings when sales volume recovers. It appears that investors have bid up stock prices in anticipation of this event.”

But robust profit margins are only half the story. Sales volume must also recover strongly for the stock market to hit new highs. (Recall that total profits = Profit margins X sales volume.) Investors have clearly become concerned that an anemic economic recovery will deprive the stock market of that necessary prerequisite.

© 2009 Michael B. Lehmann