Why the Dow Jones Is Surging Today

Caterpillar (NYSE: CAT  ) is leading the Dow Jones Industrial Average (DJINDICES: ^DJI  )  up after the European Central Bank announced new stimulus measures to boost growth in Europe. As of 1:30 p.m. EDT the Dow was up 92 points to 16,830. The S&P 500 (SNPINDEX: ^GSPC  ) was up 12 points to 1,940.

The big news today is the European Central Bank's stimulus plan. The European Central Bank cut its lending rate from 0.25% to 0.15% and cut its deposit rate from 0% to -0.1%. This means it now costs banks to deposit money with the central bank, giving banks an incentive to loan this money out or put it elsewhere. This is first time ever that a major central bank has adopted negative interest rates. Sweden and Denmark, relatively small countries, have done so before in an effort to keep out fast money, but this is uncharted territory for a major central bank.

The European Central Bank hopes these measures will spur lending in Europe. Europe, like most developed nations, is highly leveraged and facing structural issues in its economy. Europe is trying to lower its debt burden through growth and inflation, but inflation has been steadily trending lower.

European Union Inflation Rate Chart

European Union Inflation Rate data by YCharts.

The above chart is only updated to April. In May euro zone inflation weakened to 0.5%, well below the European Central Bank's target of 2%. The European Central Bank fears that the economy will actually experience deflation, which can lead to a cycle in which consumers, expecting prices to fall, hold off on purchases, slowing economic growth and in turn causing prices to fall more. This is what Japan has been experiencing for almost two decades now, with disastrous results for investors in the country. As such, the European Central bank introduced today's measures to spur growth around the eurozone. With Dow Jones companies deriving a significant portion of their revenue from Europe, it is no surprise the Dow is higher today.

Caterpillar is leading the Dow Jones today, up 2.3% as investors expect the European stimulus will help spur on growth in Europe. Caterpillar sells heavy machinery to the most economically sensitive parts of the world economy: the mining, energy, and construction sectors. While some investors believe Caterpillar could hit $120 per share on the strength of its U.S. energy and transportation segment, I still believe Caterpillar investors are overlooking ominous signs for the company -- namely, the continued slowing of the Chinese economy, which is driving the world's commodity sector, and the fact that new growth is coming mainly from the construction sector, which is Caterpillar's lowest-margin segment.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock and join Buffett in his quest for a veritable landslide of profits!


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2014, at 1:49 PM, yourgios wrote:

    This market is great, just thinking if I will have time to bail if the market tanks...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2984096, ~/Articles/ArticleHandler.aspx, 12/22/2014 2:49:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement