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When Talking Dow 14,000, ‘Remember 2007’

The Dow Jones Industrial Average crested 14,000 last Friday. And while the benchmark stock index has rolled back slightly and is fighting to reclaim the mark today, talk about new highs for stocks is heating up — most obviously in the self-congratulatory Barron’s cover this week that is making the rounds.

So will the current highs last? Maybe … but a heaping helping of skepticism is warranted.

As Liz Claman told me this week, “The market is, was and always will be a casino” and your profits sometimes leave so fast “you don’t even get time for a goodbye hug.”

I recently conducted a Q&A with my friend Liz Claman, Fox Business Network anchor and host of the end-of-trading programs at FBN, including Countdown to the Closing Bell at 3 p.m. EST and After the Bell at 4 p.m. And Claman urges everyone to remember that while the highs are great for sentiment, we would do well to remember what happened last time.

“While the markets have earned the slow climb back, everyone needs to remember history,” Claman said.

She also drew parallels to the housing boom and bust, explaining how the problems seemed obvious to some but went unnoticed by millions of others until it was too late.

Fox Business will air a special real estate-themed program Friday at 3 p.m. EST, and Claman was nice enough to share some of those thoughts with me a bit early. Housing clearly has a big role to play in 2013 for the stock market, and whether Dow 14,000 sticks has a lot to do with whether gains in the real estate industry stick, too.

Here’s what Liz Claman had to say:

Q: Wall Street likes round numbers. But does Dow 14,000 really matter, especially since we’ve already rolled back a bit?

A: I’m going to take the other side of a trader argument here. Traders and most financial journalists scoff and say it doesn’t matter. Here’s why it does matter: Anyone who put money into the market in 2004 or shortly thereafter saw the worth of those investments inflate along with 14k for the Dow. Watching those investments — from your 401k to your kids’ 529 college savings plan — then deflate by the thousands of dollars was traumatic. It changed the entire psychology of the investing community from elation to emotional depression in some cases. I watched my children’s 529 college savings plans lose so much money. The other day I checked on the funds again and they were finally back to where they had been before the crisis. That actually matters to me, and I’m assuming it matters to investors thinking about committing more money to the market.

Q: What’s the difference between Dow 14,000 now and the first time we hit it in 2007? What did you feel the first time, and how do you feel about the market and economy now?

A: When the Dow hit 14,000, it was another round-number step on the march higher. I remember thinking, “We’ve seen this movie before back during the dot-com bubble.” I don’t forget things easily, and in 2007 I was very mindful of two things that worried me: Home equity lines of credit tied to the prime rate were experiencing dramatic jumps in interest rates — I had one at the time and while we had only spent $20,000 on a renovation, suddenly I owed $26,000 — and there was too much ebullience in the housing market in general. It wasn’t a confetti-and-hats kind of day back then. This time around, it was more of a “remember 2007” feel to it. While the markets have earned the slow climb back, everyone needs to remember history.

Q: Bigger picture, does the Dow itself even matter? Many think it’s an inferior index to the S&P or even the Nasdaq.

A: I put credence in the Dow only as far as others do. Meaning, because I know the retail investor likes to look at it, we look at it. But the S&P is a far broader — and, I believe, better — indicator. A jump in the S&P which is comprised of 500 of America’s best and brightest companies has more heft for my sensibilities.

Q: Investors have just gotten sick and tired of the whole “uncertainty” game. Are they failing to price in risk as a result, or is it true that all the bad stuff is reflected in valuations already?

A: I’ve always believed you should never invest money you can’t afford to kiss goodbye. Sometimes it’s gone so fast when the herd turns tail you don’t even get time for a goodbye hug. The fact is, the market is, was and always will be a casino. If you’re looking for certainty, go somewhere else. The market’s returns will never be certain. That said, over time it has a much better rate of return than cash. It’s a gamble, but over the years, the gamble usually pays off.

Q: You’ve seen plenty of bear-market rallies as well as long-term runs for stocks. Is it just bias for the short-term to say that Wall Street is different and more confused in 2013, or is this kind of conflicted recovery something the market should be familiar with?

A: The smartest investors don’t try to anticipate whether Wall Street is confused, right or wrong. They study the fundamentals — both macro and micro — and then take a flying leap, often with hedges (or safety nets) built in. I remember asking a billionaire who made his billions betting against subprime, “How did you know all those mortgages would go south?” he answers, “Easy. I just looked at how many Californians were employed vs. how many had risky subprime mortgages and realized if there were any kind of bust, if any of them lost their jobs in meaningful numbers, you’d have mass foreclosures.” Simple to him, not to millions of others who never stopped to look, assess and make a decision based on fundamentals and facts with a few realistic possibilities thrown in.

Q: I find it funny that in 2009 and 2010, some said the rally was unsustainable because small-time retail investors weren’t invested. And now that they are considering investing, it’s a bearish sign. What’s your take on Joe Investor out there — is it smart to invest now or smart to sit this out?

A: I’m of the belief that if you dollar cost average (pick a fixed amount and invest monthly) and invest in funds comprised of strong, quality names, that way you have the benefit of being in for the climb. Granted, you have to ride out the drops, but American business is a gutsy endeavor. It always comes back. I’ll take that bet any day.

Check out Liz on Fox Business at the end of the trading day, and tune in Friday, February 5, for a special real estate-themed Countdown to the Closing Bell at 3 p.m. EST.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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