The 2012 Dow Jones record high edged closer to the 13,000 marker on Friday, February 17, 2012. It has not soared to that height since the period before the 2008 financial crisis. Standard & Poor’s and Nasdaq all reported record highs, setting a record for 2012. A consistent drop in the unemployment rate and optimism for the Greek debt talks are helping to fuel the market surge.
If stocks can manage to break through the 13,000 barrier, no doubt it will give a further boost of confidence to investors. In fact, it might be so inspiring as to spark a major sell-off that could cause a temporary drop in the market.
Still, the surge in the market is welcome news for investors who have been tossed on the rocks of conflicting economic headlines about the U.S. economy and impending failure in Greece. Christina Rexrode covered the bases in her February 17, 2012 article for AP Worldstream titled, “Dow average closes within 50 points of 13,000.”
“Though recent news about jobless claims and housing starts have been incrementally better, they’re still far below where they need to be for a full recovery. Greece and its lenders no sooner hammer out one portion of a debt deal before they find something else to disagree on. In the 33 trading days of 2012 to date, the Dow has risen on 19 and fallen on 14,” Rexrode explained.
Is the recent upward trend based on emotion or economic reality? Probably a little of both. The February 16, 2011 jobs report showed that new unemployment claims had fallen to 348,000, their lowest level since February 2008. There are also encouraging signs that European leaders are close to finalizing the terms of the Greek debt bailout.
Pending Greek debt settlement
On Monday, February 20, 2012, European finance ministers will meet to put the final touches to a bond swap agreement with Greece’s private lenders. Despite worries that strained relations might cause the eurozone nations to allow Greece to default, investors have held fast to their belief that member nations, particularly Germany, will back the bailout.
Julia Kollewe detailed the terms of Monday’s debt bailout agreement in her February 19, 2012 post for The Guardian titled, “How does Greece’s debt swap work?” According to Kollewe, private bondholders will exchange 200 billion euros of Greek sovereign debt “for a mixture of new bonds of a lower value and cash. The long-awaited debt restructuring will happen between 8 and 11 March, not long before Athens has to pay back a €14.5bn bond maturing on 20 March.”
It is expected that the European bailout fund will add 30 billion euros to sweeten the deal for bondholders and make up for part of what would have amounted to a loss of 70 percent on their bond holdings. The details of the deal are to be finalized on Monday the 20th. If an orderly, voluntary agreement can be reached with bondholders, it will go a long way in avoiding turbulence within the world financial markets.
Reasons to believe
The fact that all financial markets are dependent on and affected by each other has been made crystal clear over the past year. Events in Europe, though far away, have a definite impact on U.S. financial markets. What should we make of current events in Europe? Christopher Power and Simon Kennedy see reasons to be optimistic about Europe in their February 19, 2012 post for Business Week titled, “Five Reasons Europe Looks Less Disastrous.”
According to Power and Kennedy, the U.S. isn’t alone in experiencing record improvements. The five high points for Europe include:
- Signs that the Germans will spearhead the Greek debt writedown
- The loosening of purse strings by the European Central Bank, which is willing to lend again
- Efforts by the International Monetary Fund to help create a permanent fund to lend to states and support the euro
- Sweeping reforms ushered in by newly appointed Italian Prime Minister Mario Monti
- The continued economic strength of Germany and France and improvement in Spain
On the whole, things are looking up so far in 2012. Power and Kennedy proposed that even if Greece defaulted and left the eurozone that it, “could actually strengthen the currency zone in the end.”