Despite sequester cuts, Dow Jones Index reaches new high

Despite sequester cuts, Dow Jones Index reaches new high

New York City : NY : USA | Mar 05, 2013 at 1:18 PM PST
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Sequester 101: What Does It Mean?

By 2 p.m. EST, the US Dow Jones Index was still at 14,264, passing the previous record high of 14,654 set on the Oct. 9, 2007. Earlier in the session the Dow reached 14,286. The move up had started in the futures before trading started.

News from the service sector was somewhat better than expected and there were also better than expected retail sales in Europe. News that China was stimulating its economy also helped boost markets.

The markets do not seem to have reacted negatively to the sequester cuts so far even Friday when the cuts first came into effect. These cuts will no doubt result in job losses when unemployment already remains high. There still is no long term solution to the $16 trillion US debt. Obama and many others have predicted the $85 billion sequester cuts will cause widespread chaos and many workers will lose jobs.

The sequester results were supposed to be so scary that the politicians would be forced to make a deal to avoid them. However, the markets do not seem at all frightened and instead have reached new highs. No doubt those who called all the dire predictions as to what would happen if the sequester cuts came to pass simply a scare tactic used by Obama will feel vindicated by the stock market rally.

The Institute of Supply Management (ISM) released results showing positive growth in the service sector. Any number above 50 shows growth and the results for February were 56. This was more than analysts had predicted as well.

In spite of a quite lackluster recovery, the Dow Jones Index more than doubled from a low in March 2009. One reason for the rise in stock prices has been the increase in corporate profits which reached record highs last year. However, to a considerable extent the profit increases were achieved through cost cutting rather than increased production or sales. Corporate profits are rising while many Americans remain without a job and wages are stagnating. The Federal Reserve also has a huge bond-buying program that also helps boost the market.

Gus Faucher, an economist at PNC Financial Services Group said that if the sequester drags on the present gains could be at risk, yet concludes:"That said, the fundamentals are better. Profits are at an all-time high, business balance sheets have improved, interest rates are low. The markets are expecting more growth through 2013." Jack Ablin, chief investment officer at BMO Bank, said that investors were moving into stocks because of low yields in the bond markets. This could in part explain the increase in prices of stocks. Some analysts warn that stocks could be at a peak .Ed Easterling, president of Crestmont Holdings, says that stocks are at a point that’s “about as good as they can get, absent a bubble. It’s time to be careful.”

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Traders signal offers in the Dow Jones Industrial Average stock index futures pit in Chicago
Traders signal offers in the Dow Jones Industrial Average stock index futures pit in Chicago
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