The United States market has had an incredibly tough time recently; and while some believe that the market declines are going to come to an end relatively soon, I’m not so convinced that we’re done quite yet. Today, we’ll take a look at why the Dow Jones Industrial Average and the rest of the major indices in the United States are falling, discuss the fundamental data leading into the market next week, and discuss what we can expect to see moving forward. So, let’s get right to it…
Why The Dow Jones Is Having Such A Rough Time
I say the Dow Jones, but what I really mean is the US market as a whole. While the Dow Jones Industrial Average has taken the biggest slide, all 3 blue chip indices in the United States are tumbling; but why? Well, there are several factors that led to the issues we’re seeing in the market today…
- The Federal Reserve – First and foremost, the declines we’re seeing today are, in part, a result of what we saw from the United States Federal Reserve years ago. In the midst of the financial crisis of 2008 and 2009, the United States Federal Reserve made the decision to reduce its interest rate to an all-time record low of 0.25%; where it has remained since. At the same time, the Fed adopted a process called “quantitative easing”; through which, billions of dollars in bonds were purchased. This made bonds less attractive and stocks more attractive for investors. In the end, the long term economic stimulus led to excessive risk taking in the market and far-less-than-attractive valuations.
- European Economic Struggles – More recently, the European economy has begun to struggle in a big way. As a matter of fact, Greece became the first developed country ever to default on an International Monetary Fund loan. However, Greece isn’t the only country in the Eurozone that is struggling. As a matter of fact, the entire currency zone is feeling the pain in one way or another. Since Europe is such a big trading partner to the United States, this led to some of the issues we’re experiencing today.
- Strong United States Dollar – While all this was happening, the United States dollar continued to gain strength; and while a strong currency may seem like a good thing, it can also lead to tough consequences. You see, when the US dollar is growing at a faster rate than other currencies around the world, United States products become more expensive in other countries; ultimately leading to declines in exports; and that’s exactly what happened. More bad news for the US market.
- China – Finally, to top things off, China’s stock market crashed; leading to concerns about the Chinese economy. The government responded to those concerns by devaluing the yuan. While this is a good move for China; it proved to cause pain around the world. Ultimately, the devaluation sent worldwide markets spiraling down; proving to be the straw that broke the camel’s back.
What We Can Expect From The Dow This Week
This week, I’m expecting to see more turbulence out of the Dow Jones Industrial Average. Not only is the European economy still struggling, China’s struggles are nowhere near over. To make matters worse, at the end of last week, the August US jobs report was released; showing that the United States is getting into headwinds of its own with regard to economic growth. The bottom line is that we’re not likely to see consistent growth in the stock market again until we see consistent growth in the struggling economy in the United States and around the world.
How To Take Advantage Of The Trends
The Dow Jones is likely to see losses next week. Therefore, put options are likely to be profitable options. To take advantage of them, simply look for short momentous growth patterns. When the growth peaks out, purchase put options to take advantage of the resulting declines.
What Do You Think?
Where do you think the Dow Jones Industrial Average is headed next week and why? Let us know in the comments below.
[Image Courtesy of The Lost Gallery via Flickr]