The Dow Jones Industrial Average (DJIA) index of 30 stocks closed at an all-time high of 14253.77. Below is a comparison of key economic indicators of 2007 and 2013:
US economy is structurally weaker in January 2013 revealing the bubble of January 2008. The crisis has downward adjusted the economic structure between 2008 and 2013 by raising unemployment from 4.7 per cent in 2007-2008 to 7.9 per cent in 2012-2013. Uncertainty due to GDP volatility has kept unemployment at stubbornly high levels.
Corporate profits – reflecting economic recovery since 2009 Quarter III and the attendant significant monetary and fiscal easing – are higher, and will seek new avenues for investment. Meanwhile, the monetary easing, which is laying the groundwork for long term fiscal discipline beginning now, is creating asset price inflation in equities.
Both US and EU economies have come to a halt in the last quarter of 2012. Reasonable investors cannot expect growth of the Dow 30 unless the 30 multinational corporations expect to invest in the United States or elsewhere in the world to create employment and cause growth.
US unemployment numbers indicate a stronger recovery in 2013, perhaps suggesting that the Fed target of 6.5% unemployment seems to be working, though the persistence of the improving unemployment numbers is yet to be seen. By explicitly targeting 6.5% unemployment the Fed is communicating to the markets that hiring workers up to 6.5% unemployment is not a concern for inflation. The Fed will begin raising the Federal Funds Rate as unemployment falls below 6.5% toward the range of 3.5% – 4.5%.
Ceteris paribus, both US and EU economies are recessionary.
Rise in equity prices in US on lower than normal trading volumes and flight from Europe to the safety of the US bond market, US index funds and China’s financial markets has become salient to the global financial markets.