The Dow Jones closed at $14,253.77 yesterday, surpassing the previous record high set in October of 2007. But what does this really mean? Does it mean we have finally moved past the devastating effects of one of the worst recessions the country has seen? Or does it mean that there is another “bubble” about to burst? Contrary to popular belief, the Dow Jones closing at a record high on Tuesday isn’t quite as significant as you would think.
The first thing that needs to be considered is that the Dow does not reflect the entire economy. The Dow is a price-weighted index that is made up of only 30 stocks. This is only a narrow slice of the American economy. The S & P 500 is a much better measure, and although it hit a 5 year high, it did not break the record. The companies in the Dow are also constantly changing and can be skewed toward one sector of the economy. The index also does not take inflation into account.
The Federal Reserve played a huge role in inflating the index. They have been buying up trillions of dollars of bonds in a process called quantitative easing in order to stimulate the economy. Central banks around the world have also engaged in “globally synchronized asset purchase programs” which pumps more money into the economy and raises the stock index as a result.
As a college student that is going to be looking for employment in a couple of years, I am still not very confident in where the economy is at. I think we still have a long ways to go, and quantitative easing can only get us so far. We need to start paying off the debt, the government needs to make serious spending cuts to reduce the deficit, and most importantly consumer confidence needs to start rising again to get the economy going. We have made some progress, but must remain focused on improvement.
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