With the Dow Jones Industrial Average going back above 10,000 last week, some Americans are breathing a sigh of relief. This magic number takes us back roughly to where the market was a year ago, though still a long way from the peak of 14,164 reached two years ago. But before anyone starts thinking that Americans have recovered much of their wealth, it's important to know that some of the recent rise this year has been illusory. Much of the Dow's increase is simply due to a lower value of the dollar.
The chart below shows how stock prices and the U.S. dollar/Euro exchange rate has changed since the beginning of the year. The stock market reached its bottom on March 6. Right after that, the dollar started falling and the stock market started rising. Just as a lower dollar makes it more attractive for foreigners to buy American goods, it also makes it a better deal for foreigners to buy stock in American companies. Simply put, the lower value of the dollar has made it more attractive for foreigners to buy American assets. About one-third of the increase in stock prices has occurred simply because the value of the dollar has fallen so much.
To get an idea how important these drops in the value of the dollar have been, if the dollar had not declined against the Euro, the stock market likely would only be at about 8,600.
The beginning of March was also when the Obama administration stopped trying to talk down the economy. During the beginning of March, Lawrence H. Summers, the White House economics adviser, blamed a fearful public for dragging the economy down and said that there was an "excess of fear." Mr. Summers was right that an excess of fear had really harmed the economy and that the downturn has been much sharper than it had to be. But it was President Obama and his administration who had been talking down the economy and creating hysteria.
It is useful not to forget how Mr. Obama exaggerated what was happening. During the president's Feb. 18 address on the mortgage crisis, he said that the nation was in a crisis 24 times. He frequently described the crisis in apocalyptic terms, saying it would drag down the entire economy. During Mr. Obama's first national press conference on Feb. 9, he characterized the country as being in a crisis 12 times and noted that it was an "unprecedented crisis" - a tone that was sure not to instill confidence. The list of administration comments screaming that the sky was falling is quite long, but after Mr. Summers' warning, those extreme outbursts receded and the stock market stopped falling.
The bottom line is obvious. Part of the increase in stock prices is illusory from the falling dollar. A lot of the remaining increase is simply a recovery from the Obama administration's rhetoric talking down the market. In March, we pointed out that Mr. Obama's doom-and-gloom frenzy had been forcing down the market and predicted that White House moderation could help bring about a market upswing.
We appreciate that the president decided to stop scaring people in March, but that thankfulness only goes so far. America needs pro-growth policies to really get the economy running again. Unfortunately, this administration is only pursuing big-government initiatives that hold back a recovery.