Dow Hits 4,000; So What? Even If You Don’t Own Stock, Economists Say, Optimism That Triggered Milestone Could Benefit You In The Long Run
So the Dow hits 4,000.
“So what?” you say. Is it going to get you a raise tomorrow, find you a better job or cut your mortgage rate?
While average Americans who never have owned a share of stock in their lives might be tempted to yawn at Thursday’s market milestone, economists said the optimism that brought it about could benefit all of us in the long run.
The Dow Jones industrial average - the world’s best-known barometer of the stock market - overcame months of uncertainty over the economy and inflation Thursday and topped 4,000 for the first time in history.
The average, compiled from the stocks of 30 of America’s biggest businesses, hit the mark just before 10 a.m. and closed at 4,003.33, up 30.28 for the day - a year after it had stalled just above 3,900.
Alvis Townley, a retired cotton farmer from Stanton, Texas, was among the unimpressed. “I don’t know what it controls or doesn’t control,” he said. “For the average person, I don’t think it spells anything.”
Ken Robinson, account manager for a Phoenix freight company, said, “I’ve always felt that even though the economy has been bad, the Dow Jones has still climbed. I don’t think it is an indication.”
Economists said that while there’s no magic or financial significance in the number 4,000, the reasons behind the market’s current rally are important.
Financial markets are rising because investors are confident that economic growth is continuing with low inflation. Interest rates are stabilizing, and a recession is unlikely.
These rising markets can make even small investors and non-investors feel there’s greater wealth around, the economists say.
“It might make you go out and purchase an automobile or new furniture,” said Randell Moore, executive editor of Blue Chip Economic Indicators, a newsletter published in Alexandria, Va.
Higher consumer spending ripples through the rest of the economy, helping keep jobs, wages and corporate profits rising.
Thursday’s milestone was triggered by comments the day before from Federal Reserve Chairman Alan Greenspan that the central bank may be finished raising interest rates.
One year ago, Fed policymakers cut short a 3-year market rally by imposing the first of seven rate increases. They had determined that rapid economic growth was raising the specter of shortages of goods and labor that could fuel an inflationary spiral.
The interest rate increases, which raise borrowing costs and can reduce corporate profits, were designed to slow the economy just enough to pre-empt inflation. But they also stalled the stock rally and sent the bond market crashing.
On Wednesday, with signs that economic growth is slowing, Greenspan suggested in Senate testimony that the central bank will soon stop raising rates and may even begin reducing them.
“So the perception is that the risk of a big upspike in interest rates has dropped and risk of a resulting recession has dropped,” said Richard B. Hoey, chief economist at the Dreyfus Corp., a big mutual fund company in New York.
This perception has been taking root for several months, helping not only stocks, but bonds as well. As bond prices rise, their yields drop, and this has a big effect on the rates banks charge consumers.
“Mortgage rates had risen well above the 9 percent level last fall and they’ve been falling very fast. I’d guess next week the average 30-year fixed-rate mortgage is going to be 8 percent,” said Moore. “This comes at a perfect time. In the spring time home shopping is at its peak and so this could invigorate the housing market.”
When financial decisionmakers believe interest rates are stable, that’s good for everyone, said Sandra Shaber, consumer economist with the Wefa Group, a consulting company in Bala Cynwyd, Pa.
“Our adjustable rate mortgages won’t adjust up, our credit card rates won’t go up, those of us trying to sell a house might find it easier to sell … and it should mean a stronger job market.”
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