Economic Mood Swings

Volatility has returned to the markets in the past few weeks. This has led to mixed messages to the public as positive economic news is mingled with sudden drops in major indices.

Most of the bad news seems to be generated from outside of the US. A major contributing factor to the outside negativity stems from the feeling of many that Europe is sliding back into yet another recession

The recent Ebola scare, which has now reached American soil, has also led to some market downturn.

The positive economic trends lately have, of course, helped the overall outlook for domestic markets and the economy. Yet these positive trends are not thought of very highly by everyone.

Falling oil prices greatly helps everyday consumers and the airline industry. Energy companies, on the other hand, are seeing a reduction in profits.

A stronger US Dollar is good for consumers and businesses that import goods and/or buy raw materials from overseas. However, exporters, emerging markets, and foreigners in general must now pay more for every US dollar.

Low interest rates are helpful to stock investors, home buyers, and homebuilders and construction companies. Yet bond investors and those looking to save will not find such low interest rates very desirable.

The falling unemployment rate is extremely positive news for the economy as more people become employed and wages increase along with competition. However the accuracy of the unemployment rate comes into question as there are many individuals simply not looking anymore due to being discouraged (for more on the importance of looking beyond the unemployment rate, click here). Also, as unemployment reaches a low enough level, interest rates will slowly increase again which will have some slight negative impact on those who profit from low rates as mentioned above.

The strong dollar and falling oil prices help to keep inflation low which, in turn, is one of the reasons why interest rates are low. Low inflation is good for consumers but impedes companies from raising profits through price increases. However, moderate to low inflation is healthy to the economy as a whole as high inflation can be very destructive.

Despite some of the recent drops in such indices as the S&P and Dow Jones, there is enough positive momentum in the economy to be optimistic about the future. Low oil prices, interest rates, inflation, and falling unemployment combined with a stronger dollar mean that the recovery is taking hold. We must be wary, though, as events overseas could make that hold less secure.

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