Wednesday, October 14, 2009

Dow Jones reaching 10,000 doesn't mean we're out of the woods yet

Some optimistic news about the economy today as the Dow Jones reached 10,000 for the first time since 2008. Despite this being a triumph for an unsure market still trying to figure out how to weather these tough times, people are being cautious.

Lately, there has been a growing consensus among both investors and economists that the battered U.S. economy hit bottom and turned around earlier this year, and is now in a recovery.

The Federal Reserve said economic activity has "picked up" in its statement after its Sept. 23 meeting, and about 80% of leading economists surveyed by the National Association for Business Economics agreed in a survey earlier this month that the recovery has begun.

But even economists who agree the economy is in recovery say that growth will be slow and difficult, with continued job losses, tight credit and further declines in home prices. And even some who believe that the current Dow 10,000 level is justified say there's still a significant risk that the economy will take a step backward.

"One of the great challenges is whether consumers and small businesses come along with this recovery," said John Silvia, chief economist with Wells Fargo. "If they don't, you either sit at 10,000 or slip back to 9,500. To sustain another double-digit (percentage) gain to Dow 11,000 is asking too much from this economy and the risks we still see out there."

So are we recovering? Tough to tell since unemployment is still high and sales are full of mixed results. The reason for the stock market hitting 10,000 could also be that companies have been cutting costs and therefore their revenue earnings are higher. However no organic growth in the economy is happening. It's essentially another bubble that could burst.

Another reason for the spike is the sweeping away of some "dirty laundry"

Another reason that comparisons to Dow levels of a year ago are risky is that two of the more troubled components -- General Motors and Citigroup (C, Fortune 500) -- were dropped and replaced by stronger companies such as Cisco Systems (CSCO, Fortune 500) and Travelers Cos. (TRV, Fortune 500) in June.

Without those changes the Dow would be almost 100 points lower now than it is with the stronger companies, although precise comparisons are difficult since GM shares are no longer traded on the New York Stock Exchange.

So don't jump the gun yet.

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