The Dow Jones Industrial Average (DJI) closed at a new high this week after closing up 167.80 points, or 1.08 percent. The Dow Jones Industrial Average is an index that tracks the top 30 companies in the United States. As a whole, this index is a very accurate measure of comprehensive market and economic trends.
The Dow Jones Index saw gains for its fifth straight week in light of positive signs from recently released economic indicators. The U.S. Gross Domestic Product (GDP) increased 2.8 percent in the fiscal third quarter. This marks the fastest growth in a year and beat consensus estimates of 2 percent. GDP is an important economic aggregate that measures consumption, government spending, investment and net exports and provides insights on the direction of the economy and economic developments. According to The Economic Statistics Administration, the U.S. economy added 204,000 jobs in October. The figure beat the 120,000 estimate and also compensated for the October government shutdown.
Aside from solid financial indicators, namely from blue-chip companies, markets move based on consumer and investor sentiment. Personal income rose 0.5 percent and spending edged up 0.2 percent this September, which gives another gust of wind to Wall Street’s tailwind.
Despite the recent positive signals to our country’s economy, there is still much speculation about the coming months. The Federal Reserve will meet again in December and with the improving economic forecasts, many believe Ben Bernanke may want taper the $85 billion-a-month bond buying program before leaving office in January. Within the current framework of purchasing, the government is pouring $85 billion into the economy each month with the idea that increasing government spending will increase the money supply and create jobs. Bernanke has previously stated that he will not begin the taper until the unemployment rate falls to 6.5 percent and inflation rises to 2.5 percent. Despite the fact that the current measures are way below their targets unemployment rate remains 7.2 percent and inflation rate is well below the target at 1.2 percent – yields on the 10-year U.S. Treasury notes rose from 2.61 percent to 2.75 percent Friday. The increased yield can be a sign that the markets believe the Federal Reserve will taper at the December meeting.
With the end of the year quickly approaching, we will soon have an answer. Fourth quarter GDP is expected to be negatively impacted by both the government shutdown and the drawdown in business inventories this upcoming holiday season. Economists still hope to see at least 3 percent growth year over year to bring the unemployment rate down by one percentage point. Between inflated third quarter inventories due to lackluster back-to-school and Halloween sales and the recent government shutdown, it is likely to miss that mark. Even if the GDP numbers are strong, the threat of a taper looms over the heads of institutional investors. With all this uncertainty, all one can hope for is a continuation in economic indicators exceeding economists’ predictions. Continual strong readings may inspire a Federal Reserve taper, but even when the tapering process begins, monetary policy is expected to remain very accommodative to driving the market higher.
Contact the writer: