The Dow Jones Industrial Average briefly climbed to 12,000 on Jan. 26. Is this a sign of hope for our economic growth? The last time the Dow traded at the 12,000 level was in June 2008, when our economy was just starting to see the effects of job losses, dollar value changes, tax concerns, mortgage defaults, and monetary policy struggles. Although we still face some of these challenges today, we are gradually seeing improvements in some areas of our financial economy.
The most positive are corporate earnings. Reported by Bloomberg, 88 out of the 120 estimates of quarterly earnings exceeded predictions. Corporations with strong business models regained some strength by scaling back and many competitors are no longer in the game to compete. Analysts predict similar expectation earnings for 2011. If analysts are correct, then we expect the equity market to improve and draw strength from our economic growth.
Some economic issues have improved since 2008, but many still persist. In order for the economy to regain its strength, long-term, several key metrics will need to improve.
The value of the U.S. currency must stabilize in comparison to other currencies. As for taxes, once China’s tax reform goes into effect the U.S. will have the highest business tax rates than other developed countries.
Federal spending has exploded in the last few years, but some could argue that it was needed to help avoid a worse recession. Our national debt has reached the $14 trillion marker and will take decades to reduce.
Ben Bernanke, chairman of the U.S. Federal Reserve, has great responsibility overseeing monetary objectives. The control of our money supply and interest rates either expands our economic growth or contracts it. When we experience a dramatic market change like 2008, it is much more difficult to predict the results of monetary decisions. Now that there is less uncertainty we may see progress in this area.
It’s been nearly 18 months since we exited our recession. Is our economic environment better? Yes, but it is improving very slowly and there are still many issues to work out. Hitting the 12,000 mark on the Dow provided some comfort for investors. We also had positive growth with the U.S. GDP — it expanded by 3.2 percent in the fourth quarter following a 2 percent annual rate in the third quarter, according to Bloomberg. As investors, we must continue to focus on our objectives and refrain from making decisions on emotions.