Last week, watching the Dow Jones Industrial Average was like riding a roller coaster. Steep declines followed by solid gains and more steep declines brought the index into the negative territory by the end of the week. After starting the week off at 17,995.72 the Dow closed the week at 17,763.24 with a loss of more than 200 points. So, what's causing the downtrend and is it likely to last? Let's take a look…
Why Is The Dow Jones Industrial Average Falling?
When a single stock is falling, it's fairly easy to pinpoint the reason for the drop. However, when the entire US stock market is experiencing declines, there could be several reasons. In this particular case, there are definitely more than one. Here are a few of the major problems…
- Meager Consumer Spending – Consumer spending accounts for a massive 68%+ of United States GDP at the moment. Unfortunately, consumers aren't spending. As more and more consumers in the US start to save for the future, growth in spending is slowing. In February, consumer spending growth was seasonally adjusted at 0.1%; the third decline in the figure we've seen consecutively!
- Dwindling Exports – This one can be directly tied to the strong US dollar in my opinion. As the United States dollar continues to strengthen, products and services produced by US companies become more and more expensive around the world. As a result, Google and other major companies pointed to a strong US dollar as a reason for missed expectations. The bottom line is that less and less foreign consumers are willing to put up the big bucks for American products and services.
- Concerns About Interest Rates – The Federal Reserve recently made a statement telling Americans that interest rates were going to rise this year, but they won't be raised aggressively. Shortly following the statement, the markets were up because investors like the idea that the Federal Reserve won't be aggressive. However, shortly following the gains, we started to see the momentum moving quickly in the other direction as investors started to think about what higher interest rates mean to them.
Is The Dow Likely To Recover This Week
In the short term, we will most likely see a few improvements; however, the beginning of the week might be a bit rough. On Friday, the news of the poor consumer spending surfaced while markets were closed for Good Friday/Passover. So, we'll probably see some market adjustments to reflect the negative news Monday. As a matter of fact, we're already seeing some affects from the bad news in after-hours trading.
The bigger concern in my opinion is the long term outlook. The Federal Reserve is at a damned if you do, damned if you don't point with interest rates. If rates stay low, the dollar will most likely continue to climb; driving exports further down the toilet. If interest rates are increased, the dollar will adjust, but it could send waves through the market leading to a major correction. Nonetheless, it seems as though they are making the decision to raise the interest rate this year. While the move may drive the dollar down and lend assistance to exports, it will also surely send a bit of turmoil through United States stocks.
Overall, 2015 hasn't been nearly as good for the United States economy, nor United States stock market as the year 2014. Unfortunately, that's not likely to change. I think we've hit a point where stimulus has gone too far; generating too much growth and leading to an inevitable correction. Now, we just wait for the correction to happen so we can capitalize on trends.