Guest post contributed by freelance finance writer Elizabeth Goldman on behalf of Sunbird Forex home to daily currency trading analysis updates.
The Dow Jones Industrial Average recently reached dizzying heights when it broke through its previous barrier of 13,000 in February, but does this mean that good times are ahead? Not necessarily. There are several important factors to consider when trying to determine what the Dow at 13,000 really means.
The Dow’s all-time high of 14,165, reached back in October of 2007, has yet to be breached but 13,000 is a good start. The market has reacted favorably to a potential bailout of Greece’s banking system, among other things. While institutional investors are largely responsible for the Dow’s recent rally, it doesn’t detract from the fact that these gains are real.
What it does mean, however, is that small-time investors are still not fully convinced that the economy is back to normal. Christopher Ruth, chief market strategist for Comerica Asset Management Group thinks that institutional investors are driving the Dow right now. “It’s not been the little guy buying stocks.” The silver lining to any negative news or skepticism surrounding the Dow’s recent rally is the fact that there is some indication that the economy is starting to recover.
The Conference Board, a private research firm, recently reported that consumer confidence is up to 70.8 in February, up from 61.5 in January. A reading of 90 or above is a strong indication of a healthy economy.
The Dow wasn’t expected to break through this ceiling so early in the year, so that’s also a positive sign. Moreover, the Dow is not standing alone here. Both the NASDAQ and the S&P500 are reaching new highs not seen since the financial crisis started back in 2008. Unemployment is also falling. January saw the addition of over 240,000 jobs to the economy. Unemployment has been dropping for five months straight – something that the country hasn’t experienced since 1994.
All of this is good news. If this trend continues, the economy could be on the road to a real recovery. Why? While the Dow isn’t predictive of the economy’s future in the short-term, it has an excellent record of predicting the long-term economic health of the country. One of the few things that could hurt the Dow, and the U.S. economy is Greece. While Greece’s debt isn’t substantial in and of itself, the way its debt is spread out could trigger a domino effect. That domino effect could push other European countries like Portugal, Ireland, and Spain over the edge and cause trouble for the U.S. economy.
Ninety-five percent of the banking industry’s total exposure to derivatives contracts is held by the nation’s five largest banks: Citigroup, Bank of America, JPMorgan Chase, HSBC, and Goldman Sachs. There are about €2.68 billion in credit default swap (CDS) claims that would need to be paid if Greece goes down.
Normally, this wouldn’t be a big deal. However, these same banks are hedging their bets both ways. If they can’t pay on their losing bets, then it could cause a domino-effect wherein other players in the CDS market start defaulting on their promises. This, in turn, could infect the entire banking industry and result in “economic meltdown part 2.” Let’s hope that doesn’t happen.
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