Dow Jones posts biggest gain since 2009, but is it sustainable?


A coordinated response by the world’s leading central banks to the Eurozone crisis led U.S. stocks to score their biggest daily percentage gains yesterday (November 30), with three benchmark indices ending with at least a 4% gain.

The Dow Jones Industrial Average (DJIA) closed at 12,045.68, up 490.05 points or 4.24%. It was the Dow’s biggest one-day gain since March 23, 2009.

The S&P 500 also surged, ending the trading day up 51.77 points, or 4.33%, to 1,246.96. It was the S&P’s highest daily gain since August 11, 2011.

The tech-heavy Nasdaq Composite Index also soared yesterday closing at 2,620.34, up 104.83 points or 4.17%.

Cheaper dollar loans

The rise was primarily caused by an action from the central banks of the world’s developed countries to prevent a lack of liquidity in most of Europe’s troubled banks. The move is meant to help stem the current Euro debt crisis into becoming a full-blown catastrophe.

Yesterday the U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan, and Switzerland said in a joint statement that they are lowering the cost of existing dollar swap lines by 50 basis points (or 0.5%) starting December 5 — effectively offering cheaper dollar loans to struggling banks in the European Union region.

The central banks also agreed to set up bilateral swap arrangements that would provide additional liquidity in their own currencies among themselves. The swap arrangements are good until February 1, 2013.

Worst may not be over yet

With U.S. stocks posting high gains, expect stocks in the Philippine Stock Exchange (PSE) today to follow suit. It is highly likely that the local market will end on a high note today as well. (Update 2 p.m.: It did. The PSE closed today at 4,290.59, up 79.55 points or 1.9%.)

However, my personal caveat to investors is to not think that the bullish trend is starting. The worst may not be over yet since problems in the EU are still prevalent and the U.S. economy has not yet fully recovered. In Europe, yields of sovereign debts have been rising because of risks of sovereign default. The Greece debt crisis may have been contained for now but other countries such as Portugal and Italy are still on the brink of default.

In the U.S., the country’s deficit is mounting and no immediate solution has been in place despite weeks of government intervention. Last week, ratings agency Fitch Ratings gave the U.S. a “negative” outlook on its triple A sovereign rating and threatened to downgrade this if policymakers failed to agree on a plan to curb the deficit by 2013.

Although U.S. unemployment figures and consumer confidence index are relatively better now, the economy is still struggling with millions of Americans, who were laid off due to the 2007-2008 financial crisis, still out of work and large corporations such as American Airlines recently filing for bankruptcy.

In short: Be wary and if you are to invest, do so at your own risk.


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