Authored by Chrstopher Caldwell, originally posted at The FT,
Why are citizens of the developed world looking a gift horse in the mouth? The Dow Jones Industrial Average rallied beyond 14,300 points this week, passing the highs it reached in 2007 just as the world economy was starting to wobble. Sure, there are reasons to be sceptical about the Dow. It is weighted, rather arbitrarily, by share price. But at least it is a quantifiable index of something. We look at 1954 – the year the Dow returned to its 1928 pre-depression high – as marking an epoch. And yet, this week, investors and pundits warned us not to read too much into it.
They have a point. In the half-decade since the western financial system almost collapsed, the relationship between stock markets and the “real” economy has seemed more tenuous. The Dow owes some of its robustness to expectations of a strong Friday employment report.
Then again, European stocks rose to a four-year high following a rise in unemployment to 11.9 per cent. Other solid-looking economic correlations are melting into air. The US property market rebounded in 2012, according to the Case-Shiller index, but the Yale economist who devised it, Robert Shiller, warned in January: “Any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years.”
Part of the reason people get less giddy about the Dow than they did five years ago is because they have learnt a bit about inequality. They suspect, more than they used to, that significant developments in the economy go on over their heads. What looks like a recovery, a rally or an increase in consumer confidence may just be the effect of elites passing money among themselves.