August 3, 2017    4 minute read

The DOW Jones Is Soaring but Will It Last?

Reaching New Heights    August 3, 2017    4 minute read

The DOW Jones Is Soaring but Will It Last?

The Boom & Bust Cycle

The cycle of an economy follows the structure of boom and bust, things are up and then they’re down. Truly, the stock market is the yin and yang of economics, one cannot exist without the other, there can be no boom without a bust lurking in the not too distant future. The 2008 financial crisis was the most destructive day for economists since the Great Depression.

During this global crisis, no market was safe, ‘the FTSE fell 31% – the sharpest drop since the current index was created in 1984’, and the DOW fell ‘3,600 points from September 19, 2008, intraday high of 11,483 to the October 10, 2008, intraday low of 7,882’ There are many estimates about how much was lost during this time with one source quoting a cost to ‘the U.S. economy more than $22 trillion’. Now as we mark the milestone of the DOW passing 22,000 it is important to remember how we got here.

Who’s to Thank?

When thinking who deserves the praise for this economic milestone with the DOW as well as additional successes in other markets, it is a choice of two presidents, Barack Obama and Donald Trump. When Obama left office, unemployment had dramatically dropped since he first sat in the Oval, ‘employment report that showed the unemployment rate had dropped to a nine year low of 4.6%.’ In terms of protecting the banks, President Obama knew that sustaining them was vital to future growth.

This was then the reason behind the push for stability in the financial sector at this time. In a report detailing the economic success of the Obama administration, it states that one of the key measures introduced to ensure stability in this volatile sector, ‘created and conducted a comprehensive stress test for the nation’s largest banks in May 2009 to ensure they had sufficient capital to withstand a Great Depression-like scenario.’

The leadership of former President Barack Obama, pulling a country from the brink of economic no return, provided the next President with a workable economy to promote his or her agenda. This is what has been happening with Trump; businesses like the fact they have one of their own in the White House.

The downside with the Obama administration was the red tape and restrictions that were imposed. However, the deregulation mantra of Trump has gone down well in both the markets and the boardrooms of companies. The success of the DOW passing 22,000 is certainly attributed to Trump’s business focused agenda. ‘The Dow has risen almost 11% since the start of the year. The S&P is up about 10%, while the Nasdaq has climbed about 17%. Analysts first said the stock rally was due to optimism about President Donald Trump’s business-friendly policies such as corporate tax reform. Now they say strong corporate earnings are boosting share prices.’

Sustainable Economic Growth

The key to this is not just creating growth but ensuring that it’s sustainable. ‘Sustainable economic growth means a rate of growth which can be maintained without creating other significant economic problems, especially for future generations. Sustainable growth in a country’s economy brings an abundance of advantages. For example, an economy that is growing is able to allow wage increases which will in turn increase the GDP per citizen.

This additional income will then help fund businesses in that country. Additionally, the more income a person gets, the more a government would be able to tax individuals, increasing the capital power of branches of government. However, there are downsides to a growing economy. As those in good jobs get paid more there will be a growing wage gap in that country. Demographically hypothetically, this will be a pay gap between men and women, between people of different religions, ethnicities, and backgrounds.

Learning from the mistakes

Although the economy is growing in confidence with a President cutting regulation to help businesses, it is important to remember that regulations in some places serve a purpose. For example, competition legislation ensures a free market place for businesses to trade competitively.

If a President chose to remove this legislation, over time it would kill innovation as businesses would just be multinational corporations, with no small startups with entrepreneurial spirit having been priced out of every market place and industry. Secondly, financial regulations, regulations that act as safe guards to ensure the effects of 2008 are never felt as hard the by tax payer again. In conclusion, business confidence in an economy is a good thing, but so is the happiness of the average person who doesn’t want to pay for another Wall Street mess.

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