The Circular Logic of Stock Market Milestones

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In the financial and political world, people care about the Nasdaq hitting 3,000 because people care about the Nasdaq hitting 3,000.

This week, wire services from the AP to Reuters to AFP to Bloomberg trumpeted news of the Dow Jones industrial average hitting 13,000 for the first time since May 2008 followed by today's news that the Nasdaq composite index hit 3,000 for the first time since December 2000. Unfortunately, it's hard to find serious people who think numerical milestones of stock market indices matter much at all. "No, we don't care," echoed David Abuaf, CIO Hefty Wealth Partners, on the Dow's rise earlier this week. But if you do find someone attributing value to the number, it typically involves a kind of circular logic. 

"The reason why investors should care is because investors care," writes investment advisor Kent Thune at About.com. "Investing is largely a herd activity. If an investor thinks the herd will like something, the investor may naturally have a bias toward that same thing and if an investor thinks the invest fears something, the investor will also likely fear it." 

Bob Moon, financial reporter at American Public Media's Marketplace, rang the same note when the Dow reached 10,000 in 2009, saying big institutions could care less but for small traders it works as a "promotional tool." "It causes people like you and me to talk about the stock market. That gets people's attention, and it makes them think, 'Well, gee, maybe I need to get in on this.'"

This kind of self-perpetuating "psychological' effect even works in the political world, as Politico's Mike Allen noted earlier this month in Playbook. "The Dow is one of the laziest possible ways for the media or voters to assess the economy," he wrote. "But it's simple and ubiquitous: a staple of top-of-the-hour newscasts everywhere in America."

Giving credence to the power of the media echo chamber, he writes "The two most important factors in a presidential election are how people FEEL about the country, and how they FEEL about the nominees. Bull-market buzz -- however ephemeral and irrelevant -- would be a huge boon to the President, on both scores."

What wonderful gift to the media, the markets are. The more we talk about them, the more inherently important our words become.

This article is from the archive of our partner The Wire.