The Dow Jones Industrial Average has reached an intraday record high of 14,198.10. If trading stays at or above a 39-point gain, the Dow will close at a record level high. Now what does that mean? It means that investors are showing more optimism about the economy. The problem is that wealth is concentrated in the hands of fewer investors. This means that the economy has a long way to go. The S&P 500 is at a five year high, but is nowhere near its record high of 1,576.09. Nine of the NASDAQ's component stocks reached new 52-week highs, according to a Mar. 5 Reuters article.
There are two ways to break the Dow record: An intraday high happens at one or more points during the day. The level at the closing bell signals a closing record. The previous closing record was set in 2007 at 14,198.10 and signaled the beginning of a bull, or strong market. Record highs are supposed to energize investors when they recover any previous stock loses. This encourages investors to take more risks and to stimulate the economy. A Mar. 5 Wall Street Journal article and comments partially credited the Federal Reserve Bank (Fed) for using quantitative easing to lower interest rates. Others believe the new record is not about the Fed at all.
Quantitative easing is an odd process that the Fed uses when interest rates are near zero and cannot be lowered any more. The Fed does this by creating money and buying up Treasuries or mortgage-backed securities from commercial banks and other institutions. According to a September 13, 2012 Washington Post article,
“This pumps money into the U.S. economy and reduces long-term interest rates even further. When long-term interest rates go down, investors have more incentive to spend their money now. In theory.”
One problem is the alarming concentration of money into the hands of fewer investors, along with Mideast instability, troubles in the EU and declining Chinese productivity. This means unsureness about whether a rise in the Dow means anything substantial in terms of U.S. job and wage recovery, investment in the nation's infrastructure and small business recovery.
The markets also respond to super mergers between giant firms, recovering housing markets and even record gun sales in the wake of the Sandy Hook School shootings. Struggling companies have restructured and may be coming out of long business slumps.
The sequestration budget cuts could plunge the U.S. into a recession or slow the economic recovery. With such concerns, even a bull market can be very volatile.
In the end, the Dow has already set a temporary record high during the day. If the exchange maintains a 39-point or higher gain, the closing bell will signal a more permanent and substantial record high.
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