Like everyone else, I've spent the last few days trying to work out exactly what the Dow surpassing an all-time high of 12,000 points means for the markets. My conclusion is to follow the numbers. The numbers always seemed to be pointing to a year 2012 record high for both markets, fueled by a massive second coming in tech stocks, and it's satisfying that now the numbers are starting to add up in the right direction.
A lot of the skeptics are pointing out - with some justification - that it's not the Dow meeting record highs that's a key indicator, but it's when the the junior NASDAQ follows suit that we should start paying attention. In part, argue the skeptics, this is because of the misleading way in which the Dow is measured - as a total culmination of all stock prices regardless of market caps, meaning that an intrinsically smaller company with a higher stock price has more impact on the indices than a larger company with a lower price - and in part it's because the Dow is full of the heavy old industrial stuff which always grows over time anyway and that it's only when the 'New Economy' stocks start rocking and rolling that we know we're in the bull ring. Indeed, The Economist made this point only a couple of weeks ago.
But all this justified skepticism misses some major points, not least historic trends. First of all, there's not a lot of real net difference between a stock price moving up and and a market cap (a company's total value according to outstanding shares) moving upwards when a) the number of outstanding shares of the company's stock issue in play is much greater than the number of privately held shares (as is the case for nearly all Dow companies), and b) when you're trying to tell whether it's buying momentum you're seeing in the markets.
Let me explain the second point a little more clearly. If Company A is worth $100 a share but has a market cap of only $100 million, whereas Company B is has a price of $1 a share but is worth $1 billion, it may be easier to move the price of Company A's stock to $200 than it is to move the price of Company B's stock to $2, but this doesn't mean to say that there's not ferocious buying going on. If anything, it says buyers are becoming more speculative - and hence aggressive - with the returns they expect from their capital by courting assets with lower intrinsic valuations (assuming the comparative valuations of Companies A and B reflect to a reasonable degree their actual assets, which is the case with the Dow).
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