Stocks climb on European Central Bank’s promise to euro’s future
TERRY SAVAGE firstname.lastname@example.org September 6, 2012 4:50PM
Specialist Joseph P. Mastrolia, left, and Broker Gerard E. Farco, right, work the trading floor of the New York Stock Exchang after the opening bell, Thursday, Sept.. 6, 2012 (AP Photo/David Karp)
Updated: May 3, 2013 12:15PM
Acombination of good domestic economic reports and a promise by Europe’s most powerful central banker that the debts of struggling countries will be supported by the euro, led the stock market to close at multi-year highs.
The Dow Jones Industrial Average posted a gain of 244.52 points, or 1.87 percent, to close at 13,292.00 — its best finish since December 2007, which marks the start of the last recession. For those keeping score, that was well before the onset of the mortgage crisis and the failure of Lehman Brothers on Sept. 15, 2008.
The more broadly based S&P 500 stock index gained 28.68 points, or 2.04 percent, ending at 1,432,12 — its highest close since January 2008. And the Nasdaq gained more than 66 points to close at 3,135.81 — the highest level in 12 years, which takes you back to the dot-com boom era.
What does all this mean to you? Well, clearly not all stocks are back to their old highs. But if you had kept investing your 40l(k) plan in the S&P 500 index fund choice — available in almost every retirement plan — it means you’d now have a gain on all your purchases over the past four years.
What does this stock market rally say about the economy? In this election year, it gives the incumbents the chance to say that your investment portfolio might indeed be better off than it was four years ago!
And indeed the stock market was reflecting, in part, some stronger than expected economic reports. Thursday’s ADP employment report showed a gain of 201,000 private sector jobs in August, far above the anticipated consensus of a 145,000 gain. That good job news comes after last week’s drop in new claims for unemployment — and leads to expectations that Friday’s monthly employment report could show a small drop from the current 8.3 percent.
Another report from the Institute for Supply Management showed its index for the service sector jumped to 53.7 last month from 52.6 in July, well above the consensus forecast for a 52.5 reading.
But the real catalyst for Thursday’s market move was a statement by the European Central Bank President Mario Draghi (whose job is the equivalent of Fed Chairman Ben Bernanke in the United States). Draghi promised a new bond-buying program that would “safeguard the monetary policy transmission in all countries in the euro zone area.”
In more simple language, Draghi promised that the ECB would create an “unlimited” amount of euros to buy the debt of the Southern European counties that currently may not be able to refinance their debts in the bond market, because of fears of their ability to repay that debt. While it is a powerful promise, Draghi still faces opposition from the German Bundesbank — and a potential legal challenge to the ECB’s ability to buy country bonds.
Still, global markets liked what they heard: a promise that Euroland would hold together. The implications for global trade and global financial institutions were all positive, as European stock markets soared along with the U.S. market.
Just one sticky issue: If the ECB is going to create more euros, what will that paper money be worth in a few years’ time? The answer was given by the price of gold, which jumped nearly $12, to $1,703 — capping a $100 gain in just the past two weeks, and a six-month high.
When a central bank creates additional money, it may avoid bank failures and move markets. But it also can destroy the future value of the currency. And that’s The Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.