The Dow Jones Industrial Average was at a record high after nearly six years, as the stock market today (Tuesday) rallied enough to push the index up nearly 70 points at the open.
Just minutes after the opening bell, the Dow sailed passed its all-time high of 14,165 hit on Oct. 9, 2007. Less than a half-hour into the trading session the Dow roared higher by triple digits propelling benchmark to yet another record.
By 1 p.m. the Dow was up 146.99, or 1.04%, at 14,274.81. The Standard & Poor’s 500 Index added 17.32 or 1.14%, to 1,542.52, leaving it in striking distance if its record close of 1,565 hit in 2007. The Nasdaq climbed 43.39 or 1.37% to 3,225.42.
Money has poured into stocks over the last several months as individuals have begun to feel more comfortable about the health of the economy – but can it last?
“The question is, can the Dow maintain these levels? The market is interested in risk-that’s why the Dow is higher, why the riskier currencies are higher,” Matthew Lifson, currency trader at Cambridge Mercantile Group in Princeton told Reuters.
Dow at a Record High: Will it Keep Going?
After the Dow peaked in October 2007, the benchmark went on to lose more than half its value over the next 15 months. The culprits six years ago were the bursting housing bubble, the financial system meltdown and the Eurozone sovereign debt crisis.
Since then, a main cushion for the Dow has been support from the U.S. Federal Reserve.
The central bank has pumped more than $3 trillion of monetary stimulus into the anemic U.S. economy since the Great Recession. It also handed out some $1 trillion in bailout loans to save a bevy of banks, insurance giants and auto makers.
For the time being, the Fed is committed to its stimulus programs.
“The Federal Reserve is here, and is going to do everything possible to support this recovery,” Fed Chief Ben Bernanke recently told CBS’s “60 Minutes.”
“So long as the Fed is in an accommodative mode and the economy is out of recession, the odds are that you will have a bull market,” David Rosenberg, chief economist at Gluskin Sheff and Associates told The New York Times.
And as long as investors believe the Fed’s got their backs, they’re more likely to put money into the market.
Why to Be Cautious About the Dow at a Record High
But a wide gap remains between what stocks and the economy are telling us. A lot of uncertainty still looms, and that may be a deterrent.
Caution is warranted about the direction of the Dow, and here’s why.
- The Fed’s Looming Exit: While the Fed is standing pat in regards to loose monetary measures right now, minutes from the central bank’s last meeting show some members are growing worried. Flooding the economy with dollars stokes inflation. The Fed’s exit strategy also has several concerned. The quantitative easing policies, which have boosted and buffered markets, will have to end sometime. That time is growing near.
- Housing’s Tepid Recovery: While housing is showing some signs of recovery, the rebound is modest at best. It will take several years to work through the backlog of distressed inventory and for borrowers whose credit has been damaged to return as buyers. In addition, lending standards have grown more stringent making it difficult for potential buyers to get a mortgage.
- Higher Prices, Less Income: Gasoline is trading at a national average of $3.80, taking more disposal income out of already stressed wallets thanks to higher payroll taxes that kicked in at the start of the year. Any extra income is likely to go to discretionary items, like food, not into stocks.
- Increasing Market Volatility: Market volatility swings have picked up. Last Monday, when Italy’s national election was unable to anoint a clear winner, the Chicago Board Options Exchange Volatility Index, otherwise known as the VIX or the fear index, spiked from 14 to 19 within a few hours before settling down. The index also spiked in the days before the fiscal cliff and sequestration deadlines.
- Wrangling on Washington: The steep $85 billion across-the-board spending cuts (sequestration) that were triggered at the start of the month are expected to shave 1.5% off of economic growth in the second quarter. That’s bound to eat into corporate profits. Also creating uncertainty is March 27, when Washington lawmakers will again face off over the country’s debt ceiling and budget. Investors hate uncertainty.
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