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* STOCK MARKET FORECASTS
Predictions of how the Dow index will change between now and the end
of the year.
The Dow Jones Industrial index - the average of 50 U.S. stocks that
represent the core performance of the U.S. economy - has averaged an
index value of 7,480 over the past 6 weeks. This is about 1,150 points
lower than the previous 6 weeks.
The recent bouncing around in the financial markets is apparently the
result of a combination of economic fundamentals and technical
indicators of market performance.
MARKET WATCH
For the past 25-30 years, the stock market has responded to changes
in money in the economy, interest rates, and key factors like economic
growth. When businesses are healthy, their stock is attractive as an
investment. Potential stock buyers and sellers compare the potential
returns on stocks to what their money would earn in alternatives like
Certificates of Deposit or Treasury Bills. With the Fed keeping
interest rates low and a weakening economy, the stock market's current
levels reflect these conditions.
We know that the US Treasury has provided over $350 billion to the US
banking system in the form of bailout payments. And, it looks like the
current Administration is setting up to do exactly the same. Over the
past 30 years or so, the channels by which this money might impact the
stock market include bank lending.
The traditional mechanism works like this:
Step 1: Banks lend money
Step 2: Borrowers put that money in their checking accounts
Step 3: They spend the loan proceeds (the amount they actually
receive from the banks) on business expenses - advertising, cost of
goods, rent, utilities, salaries, etc. - the normal types of things a
business would buy.
Step 4: This spending then winds up in other companies accounts as
part of their income from sales.
Step 5: They then spend from their profits.
And on it goes ... the most important first step requires that the
banks have to make the loans. Otherwise there is no impact.
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