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Double Dip Recession: Why Dow 10,000 May Not Last

October 14, 2009 by Silicon Valley Blogger

Is the bull back?!

Now that the stock market has hit the magic Dow Jones 10,000 mark, it sure feels like a hard fought climb up to that milestone. It’s still a ways away from 14,000 for the DJIA, which was once achieved in 2007, but as some of you may think — “we’re getting there.”

Image from the NY Times

Double Dip Recession: Why Dow 10,000 May Not Last

But here’s the thing: like many other market followers, I am quite nervous about this development in the equity market. Sure, we’re supposedly in an economic recovery right now, but many people are still feeling the pinch of lost jobs, no jobs or upside down mortgages, as far as I’ve noticed. As I’ve discussed before, we’re far from celebrating here in the SF Bay Area: the California unemployment rate is stuck above 12%, and as this interactive graph shows, it’s only gotten worse over time.

What’s more concerning to me is this thing that some economists are warning about: the risk of a double dip recession for our economy. For instance, I heard about how Carl Icahn (a billionaire investor) has been addressing the possibility of a double dip recession due to continued rising unemployment, which could very well impact the coming retail season as people put a cap on their spending. According to him, “we’re right on the precipice” of another economic contraction (quoted from this Bloomberg article). Here are some interesting points on this:

Yahoo Finance chart of the Dow Jones over the last 5 years.

The stock market going to 10,000 could simply be caused by investors realizing that we aren’t really going to the doghouse as badly as we initially thought. Good to know that so far, we’ve established the 6,000 level as “the bottom”. But really, is the Dow at 10,000 (or even 9,000) justified right now? I’m definitely in the camp that doesn’t think so.

As I review the fundamentals, I feel uncertain about this upward march in stock prices.

• We’re supposed to be recovering from the worst recession since the 1930s. Somehow, I expect it to take more work for us to pull out of the depths of this hole.
• In September of 2009, unemployment went up to 9.8% nationally, the highest levels since 1983.
• Can inflation be around the corner?
• What’s fueling the market’s rise? Improved earnings reports, apparently, but these are a result of business cut backs and company layoffs, rather than real growth.

So what do you think. How long will this mini-bubble last? Is anyone optimistic?

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