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Just minutes after the New York Stock Exchange opened this morning (Tuesday, 23 December), Santa delivered an early Christmas present. The Dow Jones Industrial Average (DJIA) went flying past the 18,000 mark for the first time ever. Only a decade ago, and certainly following the 2008-2009 financial crisis, no one would have believed that 18,000 would be possible.
Not only did the Dow break through the 18,000 barrier, it skyrocketed by 85 points, reaching 18,040. It gives no sign of a drawback in the late morning hours, jumping from 18,036 to 18,043 within the last few minutes (It is 11:20 a.m. on the U.S. east coast as of this moment).
The Dow has gained nearly 1,000 points in the last week, having closed at 17,067 on 16 December. The trading floor on the NYSE is abuzz in anticipation of the index passing 18,067, although that is not likely to happen today. The Dow closed above 17,000 for the first time on 03 July this year, but struggled to remain above that demarcation for any sustained length of time until 21 August. It pulled back under 17,000 for most of October, but has closed above that mark every day since 30 October.
A combination of factors has contributed to the sudden gain, but I fear that both consumer and investor confidence, the broad factors pushing the Dow upward, may not be good news for the long term. Those factors include:
- Consumer response to the drop in oil prices. As I mentioned in articles over the past two weeks, consumers have been excited by the prices at the pump. The problem with the American consumer is that, when they save a few cents at the pump, they spend hundreds of dollars more on travel and consumer goods. That, of course, is good for the market.
- Investors are shuffling funds to companies that can gain growth advantages as a result of the lower fuel prices. Saudi Arabia’s announcement this week that it will never reduce production, even if oil slides to $20 per barrel, has certainly had an impact. The real question here, however, is “Do we really believe that?” I’m not questioning their integrity at all, but I am saying that things change, and, while the Saudis can sustain even the worst drop in oil prices, other OPEC nations cannot. That issue could unravel in several different ways, including a major disruption within OPEC. While the short-term impact is most certainly obvious, the longer-term effect could introduce political and economic upheaval of potentially apocalyptic proportions.
- The “patient” position of the Federal Reserve Board. The board’s typically cryptic, and often ambiguous, language seems to signal a possible increase in the prime lending rate sometime in the early half of 2015. Whether or not that happens remains to be seen, but for the present, the mere suggestion of it happening is considered a strong positive for the markets.
- An increased U.S. GDP in the third quarter that exceeded original estimates by 1.1%, the best quarterly growth the U.S. has experienced in 11 years.
These are not the only factors. Some of the others that may be affecting the Dow are not so positive, which makes my point.
The widespread assessment is that things are getting better. But, let me add this final observation. Americans, the British, and the world are looking for good signs among the bad. We all want good news so much that, when we get it, we can easily overreact, believing that some good news is so refreshing that we perceive that it is strong enough to outweigh the bad. That may not necessarily be so.
If I’m beginning to sound like a descendant of the Grinch on my mother’s side and of Scrooge on my father’s, I don’t mean to be. So, let’s just enjoy the moment together.
