Dow heads to all time high on--faith in central bank stimulus?

03/05/2013 12:11 pm EST


Jim Jubak

Founder and Editor,

The Dow Jones Industrial Average is poised to set an all-time record high today.

While we’re whooping in celebration and waiting for the caps we’ve thrown in the air to come down, let’s take a moment to ponder “Why?”

Okay, the service sector survey of purchasing managers from the Institute for Supply Management Highlights increased to 56.0 in February from 55.2 in January. That’s the highest level since February 2012 and above the 55.4 that economists were expecting. (In this survey anything above 50 shows the economy is expanding.) In normal times the service sector survey doesn’t carry much weight since it’s much less cyclical than the manufacturing sector. But today I think this is being greeted as confirmation that the automatic cuts in government spending that went into effect on March 1 as a result of the sequester haven’t yet –four days later--squashed U.S. economic growth.

The market seems determined today to read the services survey for the EuroZone as positive. The numbers released this morning are indeed, at 47.9, better than the preliminary 47.3 report, but the sector still shows a contraction from 48.6 in January—and still shows that economic activity is slowing. Maybe the market was cheered by news in the survey that showed continued growth in the German service sector—although even here the 54.7 reading is below January’s 55.7. The numbers from France—43.7—and Italy—43.6—showed those two economies in a severe contraction.

No, rather than any specific economic good news, I think today’s rally is a continuation of the market’s faith in the world’s central banks and government stimulus. Overnight China reaffirmed its 7.5% GDP growth target for 2013 and announced a budget with a 10% increase in government spending. Add that to continued belief in stimulus from the Federal Reserve, the Bank of Japan, the Bank of England, and maybe soon the European Central Bank and why shouldn’t stocks be in rally mode from Tokyo to Hong Kong to Frankfurt to New York.

It would take a real curmudgeon to suggest that with the Dow near an all time high on faith in global central banks, this rally might be a good time to raise a little cash.
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