Dow Crosses 10,000- Is It A Reason To Cheer

Last month the Dow Jones Industrial Average crossed 10,000 points, passing the emblematic mark for the first time since Oct 2008 bringing optimism to investors across the world. Since hitting a 12 year low of 6,547 on March 9 2009, the Dow Jones industrial average has increased by 53 percent. Other indices like the S&P 500 Index and Nasdaq Composite Index, which measures a broader base of major stocks, also reported gains. Year to date, the Dow is up 14.1 per cent, while the S&P 500 and Nasdaq Composite have increased by 20.9 per cent and 37.7 per cent respectively. Small stocks have also registered increase as indicated by the Russell 2000 index which has increased by 24.9 per cent.

Since January Dow has increased mainly due to gains in financials and technology stocks. The big gainers among the financial and technology stocks have been American Express (up by 89.2 per cent), IBM (up by 52.5 per cent), Cisco Systems (up by 49.6 per cent), JP Morgan (up by 49.6 per cent) and Intel (up by 42.1 per cent).

But is this really an indication the economic downturn is seeing an end. Why is it that many people still remain sceptical that the stock market can climb much further. To answer this lets analyse the factors that caused Dow to cross 10,000 mark. Investor confidence was boosted by better than forecasted retail sales figures and strong third-quarter earnings reports from technology and financial firms. Financial shares were helped by the unexpected seven-fold increase in JP Morgan Chase profit from last year to $3.59 billion. Technology shares reacted positively to the higher than expected quarterly earnings of $1.9 billion reported by Intel. On the economic front Fed’s comment that economic activity in the US has picked up also helped the stock market. Based on these positive developments the Fed also raised its growth forecasts for the coming year.

To put things in perspective let us look at the overall economic climate which is definitely better than last year. However it is still a long way to go before economists finally declare that the worst is over.  The fact that unemployment is at an all time high of 9.8% continues to stare at economists. Also recovery is not expected to be strong enough to make a serious impact on unemployment. The Fed expects unemployment rate to drop to 9.25 percent that too only by the end of 2010.According to the US census Bureau, US retail sales registered the sharpest drop this year of 1.5 percent in September from the previous month. However the drop in retail sales was less than expected and was mainly on account of end of government’s cash-for-clunkers programme. If we exclude motor vehicle sales, retail sales has actually shown an increase on the month. A look at financial statements of companies who have reported increase in profit will clearly show that much of the increase in profits has come from cost-cutting not revenue growth. In the currency market, the dollar fell against most of its counterparts . The dollar index, which measures the strength of the dollar against a basket of six other currencies, fell to fourteen month low figure.

In conclusion I feel that all these positive news has to be taken with a pinch of salt. It is only a small step in the long bumpy road ahead.