It is not surprising that the index slipped back again. The surprising thing is that it has got anywhere near that level at all. Wall Street has risen almost five-fold in the past 10 years and tripled in the last five years alone - a pace of growth that makes the tripling of prices in the UK and Germany over 10 years look pedestrian and the halving of the Nikkei index positively embarrassing.
Stock markets cannot prosper for long if the underlying economy where profits are made is doing badly, but economic growth is clearly not the only factor at work. The US economy has done well in the past 10 years but not that well. The real economy has grown by an average of 2.5 per cent a year, or 30 per cent overall, outpacing the UK, Germany and Japan. But that alone does not explain the superior performance of Wall Street. The explanation lies in the way in which the US economy has grown, not the amount.
Much to the surprise of most observers, who felt the US economy had prospered in the 1970s on a mountain of debt, which would eventually undermine it all, the US has grown by exploiting new technology and especially information- based technology; by improved use of fuel and raw materials; and by making better use of its labour force. The hourly wages of Americans have not reflected the growth in the economy, especially for those who have been driven out of the factories and forced to take low-paid insecure jobs in the service sector. But the transfer has kept down social security costs and prevented wage inflation.
In fact US inflation has fallen from more than 5 per cent in 1990 to less than 2 per cent, and US investors no longer feel they have to build in a fat nominal return to protect their real returns. Dividends also matter less when investors are making substantial capital gains. Total returns on Wall Street have been negative in only two of the past 10 years and have ranged from 10 per cent to 37 per cent in eight of the last 10. If this can continue, it is hardly surprising that investors are now willing to pay 34 times the average earnings on top US shares and accept dividend yields of less than 2 per cent.
Profits have grown appreciably faster than earnings, shifting the classic division between labour and capital decisively in favour of the latter. The US is also enjoying the fiscal benefits of a boom because government tax receipts are strong and the budget deficit is not a serious problem.
These trends cannot go on for ever. A continuing shift in advantage from labour to capital will start to reduce demand in the US economy. The massive US trade deficit is a more immediate worry. The rest of the world is only too happy to allow the US to run a trade deficit to help pull other countries out of recession, but there are fresh signs of discontent in other developed economies at the way the US is always able to pay for its imports by printing dollars.
The fact that US investors can now get three times as much income from bonds than they can from shares is another danger sign, and this contrast will become much more obvious as soon as the stock market stops climbing and capital gains turn into capital losses. The US stock market is not as overvalued as a static comparison with previous bull markets would suggest, but it still looks overvalued.
The UK economy has been travelling along the same path as the US, making more efficient use of labour, shifting the balance of advantage in favour of capital, and bringing inflation and budget deficits under control, with similar effects on the stock market. Share prices have risen to 25 times earnings, and dividends yields have dropped to 2.5 per cent - half the return on government bonds. In recent years the FT-SE index has underperformed the Dow Jones but it could have further to go before it peaks.
European stock markets have performed strongly through the 1990s, helped by increasing liquidity and hopes of mergers in the single European market. But the behaviour of the Japanese market shows that nothing goes on for ever. In the 1970s and 1980s, the Nikkei rose to dizzy heights because Japanese companies were growing on export earnings and investors were chasing capital gains and ignoring the negligible dividend yields.
When the bubble burst investor confidence collapsed and shares looked ridiculously overvalued. It is still too soon to say that the Japanese market looks cheap.