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Bumping up against the Dow’s ceiling?

September 17, 2012

Market watchers might have noticed a trend lately: the Dow Jones seems to be bumping up against what seems to be a peak of around 13,500. The index has approached this number a few times before falling back somewhat. There is nothing magical about this somewhat arbitrary number, and it certainly doesn’t represent a “hard ceiling”, but the reluctance of investors to push past this threshold does strike me as noteworthy.

It seems to indicate some ongoing uncertainty and/or fragility that is currently built into the marketplace. It could be interpreted as somewhat of a bearish development; at the very least, it highlights big-picture questions that will likely have an impact on the global (and the U.S.) marketplace going forward. I think perhaps the most unsettling are 1) whether or not European leaders will be able to put into action their policies to deal with the debt crisis, 2) whether or not the U.S. will get another dose of monetary stimulus from the Fed, and 3) whether China’s economy will go into recession or remain fairly strong. After years of explosive growth, we are now seeing signs that China’s economic expansion has slowed significantly.

From the point of view of American investors, the biggest question mark remains in Europe. ECB President Mario Draghi has pledged to do whatever it takes to keep the European Union out of a true crisis, including a recent promise to buy Spanish and Italian bonds, and the market wants to see additional details about the size, scope and terms of those purchases. Europeans are also talking about a bigger bailout fund, but with Germany and France getting restless, those prospects remain less certain. Whether or not the Dow can break through its recent 13,250 “cap” probably also depends on the evolving assessment of whether or not Greece will ever be able to get out from under its debt burden, which currently sits at around the dauntingly large figure of 160% of GDP.

Outside of Europe and China, perhaps the biggest key unknown is right here at home, where U.S. (un)employment continues to be an issue (the economy is adding jobs, but at a fairly anemic pace) and will undoubtedly have a significant impact on where the stock market goes from here.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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