Two factors make reaching the 10,000 milestone for the Dow what Dorsey Wright calls “the quintessential Pyrrhic victory” for many investors around the world.
First, bond funds attracted net deposits of $209.1 billion in the first eight months of 2009, while stock funds drew just $15.2 billion. For every new dollar moving into equities, $14 was moving into bonds.
This shows that investors who lost money in the collapse of 2008 were moving what was left to the perceived safety of bonds, just as the market bottom materialized. This is not unusual.
Second, according to Dorsey Wright, the continued decline of the U.S. dollar has meant that foreign investors in U.S. markets have not been made whole. Far from it. They gained more dollars as the market recovered, but each dollar is worth significantly less.
In terms of the Euro, the Dow would need to rally an additional 45% to return to its October 1999 levels … and that’s assuming no further decline in the U.S. dollar. The Dow would have to recover 46% for Australian and Canadian investors to recover. At least when priced in the yen, the Dow is within less than 20% of its 1999 levels.
Some believe the current rally is a “fool’s rally,” which is not grounded in solid market fundamentals. If that’s true, it may be a long time yet before most investors’ portfolios return to the level they were at in 1999.