Dow closes above 16000, but some economists are worried

The Dow Jones Industrial Average ended Thursday at a record 16009.99, which was up 109.17 points. But some see the stock market as an ‘asset bubble’ fueled by the Fed’s bond-buying program.

Brendan McDermid/Reuters
A screen shows the Dow Jones Industrial Average just after the closing bell on the floor of the New York Stock Exchange on Nov. 21. The Dow closed above 16,000 for the first time as stocks rebounded from three days of weakness.

It’s been a year of records for the Dow Jones Industrial Average, and for the first time in history, it closed above 16000 points on Thursday.

The Dow ended the day at 16009.99, up 109.17 points or 0.69 percent. Thursday's gains put the blue-chip index up 22 percent this year – on pace to break the record annual rally of 25 percent in 2003. The Dow is also up 145 percent since the Great Recession lows of 2009.

The markets reacted positively to news from the US Department of Labor, which reported Thursday that initial claims for unemployment fell more than expected last week, dropping 21,000 to a seasonally adjusted 323,000.

The benchmark Standard & Poor’s 500 – which flirted with its own record mark when it eclipsed 1800 points for the first time during trading Monday – also rose 14.48 points, up 0.81 percent, to close at 1795.85. The Nasdaq Composite Index was up 47.88, or 1.22 percent, to close at 3969 – levels the tech-heavy index has not seen since the tech bubble burst at the end of the 1990s.

As low interest rates keep the money spigots open, financial experts say investors have been pouring more cash into stock-based mutual funds than they have in 13 years – $172 billion since January, according to Morningstar Inc. estimates.

The markets were pleased, too, as Janet Yellen cleared a major hurdle in becoming the first woman to head the Federal Reserve. The Senate banking committee voted 14 to 8 to approve her nomination on Thursday, sending it now to the full Senate for confirmation.

Ms. Yellen has been a force keeping the easy money flowing as a means to help the job market, and she and her Fed colleagues have surprised investors the past few months when they decided not to “taper” the central bank’s $85 billion per-month bond-buying program.

Yet this market, saturated with cash, has left some economists worried.

“The historic high stock market is an asset bubble fueled by Fed easy-money policy and not supported by economic fundamentals,” says Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University’s School of Management. “Historically, stock markets are driven by strong corporate earnings and economic growth. However, this stock market is being propelled by Fed easy-money policy and corporate stock buybacks.”

Even as the economy lumbers at a tepid pace and overall employment remains at lows not seen since 1978, the stock market has nevertheless reached these gaudy record-setting numbers.

“Once tapering begins by the second quarter of 2014,” Mr. Williams predicts, “the current stock market bubble will be pricked. Ironically, the Fed has caused the current stock market bubble and will be the one that deflates it.”

“If tapering is done too quickly, the drop could have devastating consequences for investors,” he says.

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