Dow Reaches 11,000 – What’s Next?

Dow Reaches 11,000 – What’s Next?

The range of opinion on the future path of the stock market is as wide as ever. Optimistic investment pundits pointing to daily improvements in some economic metrics see opportunity for gains in the short-to-medium term, but hasten to caution that those gains may be short lived as significant market headwinds arriving as early as this fall could derail the market’s climb for many years to come. Some are hopeful that those headwinds will mitigate if republicans regain control of congress next November and temper the Obama administration’s anti-growth tax-and-spend economic agenda.

Pessimists acknowledge those daily improvements but believe that the market’s dramatic recovery since March 2009 is primarily the result of temporary government and Federal Reserve intervention that has stabilized the economy and the markets. They believe that the private economy is not yet self-sustaining and cite the persistence of many of the circumstances that caused the great crash last year as gnawing reminders that it is premature to claim victory over our economic woes. Furthermore, they believe the dramatic expansion of debt and deficits among the world’s major governments is a substantial threat to full global economic recovery and long term prosperity. Pessimists concede that congressional gridlock next year could stop the rampant government spending, but hasten to point out that gridlock won’t reduce the already robust government debt and deficit that inevitably higher interest rates will further exacerbate.

The optimists know that bull stock markets begin with seemingly unimportant short term economic improvements, but the pessimists know that market moves also anticipate the long term health of the economy. And, everyone knows that the US economy relies heavily on a US consumer that continues to weaken under the pressure of chronic high unemployment, growing credit restrictions, negative home equity, and bleak prospects for higher taxes, not to mention the negative outlook for both public (social security/Medicare) and private pension systems. Imagine what a spike in oil prices would do to consumer spending, as the situation between Israel and Iran approaches a climax later this year.

Given our economic predicament, it is rather amazing that the market has recovered so far so fast, especially because optimists and pessimists agree that our critical economic challenges are likely to reemerge as issues later this year and fester for many years. If the hard times do start as early as this fall, there is a real risk that a correction could begin as early as next month. Everyone knows that the market typically retreats during summer months, and if investors anticipate bad times ahead, it is more than a possibility that the slightest provocation could cause a major decline sooner rather than later. After all, who wants to be on vacation when the market corrects?

Moreover, one must wonder how the currently cheerleading financial media factors into the market’s good fortune lately. The media continues to encourage short term investment even in the face of an imminent, potentially violent market turnabout. When will the media trot out all the so-called doom-and-gloomers? After the correction begins, as they did last time? It would be instructive to balance all the bullish reports with the views of some well informed market bears, BEFORE the downturn actually begins. No one wants to hear their market autopsies AFTER the market starts sliding. The bears have been caged for so long, let’s hope the mere media appearances of them do not themselves trigger a market correction.