Commentary Magazine


Topic: Stock market

The Dow at 15,000

The Dow Jones Industrial Average hit 15,000 this morning, the first time it has crossed that benchmark. Even if it backs off and closes below that level, this is a remarkable recovery from its Great Recession low in March 2009, when it hit 6,626. In the last four years the Dow has risen 123 percent.

How do we square such a bull market with the anemic recovery I noted earlier today and the long period of sub-par growth that Pete Wehner referred to? To be sure, the stock market is a leading indicator, recovering sooner than the economy as a whole, whereas unemployment is a lagging indicator. But it takes more than that to explain things.

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The Dow Jones Industrial Average hit 15,000 this morning, the first time it has crossed that benchmark. Even if it backs off and closes below that level, this is a remarkable recovery from its Great Recession low in March 2009, when it hit 6,626. In the last four years the Dow has risen 123 percent.

How do we square such a bull market with the anemic recovery I noted earlier today and the long period of sub-par growth that Pete Wehner referred to? To be sure, the stock market is a leading indicator, recovering sooner than the economy as a whole, whereas unemployment is a lagging indicator. But it takes more than that to explain things.

A major part of the reason, I think, is the fact that there is a lot of cash–corporate, pension fund, and personal–sitting on the sidelines right now. The uncertainties regarding Europe, ObamaCare, Syria, etc., are making companies reluctant to put that capital into expansion.

But the usual places to invest cash, such as treasuries or CD’s, are paying practically nothing right now, with the Fed keeping interest rates at records lows. Even ten-year treasuries are paying a dismal 1.72 percent, treasury bills, which mature in less than a year, far less than that. So the only game in town is the stock market and money has been pouring into Wall Street, sending the markets up and that, of course, becomes self-re-enforcing.

Will it last? That depends on the outcome of the various uncertainties.

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Economic Shoes Are Dropping

If the stock market is truly a leading indicator (and it tends to be one of the more reliable ones), then the Obama campaign had better start worrying. May has been a brutal month for the Dow. It closed May 1 at 13,279. As it approached noon today, it’s at 12,360, down 59 on the day. That’s a decline of 7.1 percent for the month, wiping out all the gains since Jan. 1.

The reasons, of course, are not hard to find: the crisis in Europe, lackluster economic data in general, a sharp drop in consumer confidence in May, an uptick in weekly jobless claims, and more.

Perhaps the biggest news is the drop in bond rates. The benchmark ten-year treasury bond is currently yielding 1.53 percent. On July 1 last year, the ten-year treasury was yielding 3.2 percent, more than twice as much. This is good news and bad news. The good news is that the federal government can finance its huge deficits more easily (and consumers can borrow more cheaply as well: mortgage rates are at near record lows). But the bad news is that bond yields go down for two reasons: a slowing economy and/or a financial crisis. As nervous investors seek safe haven, demand for treasuries rises, pushing down yields. (French and German bond rates are also very low for the same reason, yielding 2.35 percent and an astonishing 1.24 percent respectively.)

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If the stock market is truly a leading indicator (and it tends to be one of the more reliable ones), then the Obama campaign had better start worrying. May has been a brutal month for the Dow. It closed May 1 at 13,279. As it approached noon today, it’s at 12,360, down 59 on the day. That’s a decline of 7.1 percent for the month, wiping out all the gains since Jan. 1.

The reasons, of course, are not hard to find: the crisis in Europe, lackluster economic data in general, a sharp drop in consumer confidence in May, an uptick in weekly jobless claims, and more.

Perhaps the biggest news is the drop in bond rates. The benchmark ten-year treasury bond is currently yielding 1.53 percent. On July 1 last year, the ten-year treasury was yielding 3.2 percent, more than twice as much. This is good news and bad news. The good news is that the federal government can finance its huge deficits more easily (and consumers can borrow more cheaply as well: mortgage rates are at near record lows). But the bad news is that bond yields go down for two reasons: a slowing economy and/or a financial crisis. As nervous investors seek safe haven, demand for treasuries rises, pushing down yields. (French and German bond rates are also very low for the same reason, yielding 2.35 percent and an astonishing 1.24 percent respectively.)

But countries at the heart of the crisis are not faring so well. Spain is not borrowing so cheaply, to put it mildly. Its current rate on ten-year bonds is 6.67 percent, more than five times what Germany has to pay to borrow. Spanish banking is near collapse and the country is in deep recession. If Spain were unable to meet its obligations and rescue its banking sector, it would be a much bigger deal than Greece’s problems. At about $1.5 trillion, its economy is five times the size of the Greek economy. Not even Germany (the world’s fourth largest economy) can write a check that big.

All eyes will be on tomorrow’s release of the jobs report for May, at 8:30 a.m., an hour before the market opens. But there are a lot of other economic shoes to drop in the next few weeks. As Bette Davis, playing Margot Channing, said in “All About Eve”: “Fasten your seat belts. It’s going to be a bumpy night.”

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