This week there was another mix of good and potentially bad economic news. While the Dow Jones Industrial Average (DJIA) broke through 13,000 for the first time since May 2008, gas prices also rose. While we will discuss rising gas prices in another post, here we focus on the milestone for the Dow. The rising DJIA is important because it means that for significant parts of the U.S. population who have their wealth in retirement accounts invested in the stock market, retirement wealth is increasing, making retiring or living in retirement easier.
The factors driving this latest rise are the same as those that drive any market: supply and demand. While it is easy to understand how this works in the market for commodities like gas or corn, it is a little more nuanced for stocks. People buying stocks, like the mutual fund managers who manage your 401(k) for you, are in the market to share in company profits. As company profits increase, company stock values generally increase either because of the prospect of a dividend or because the competition to hold stocks in profitable companies is fierce.
Recent earnings reports for DJIA companies like General Motors have shown that profits are up. This is generally true across the board for DJIA companies, which is most likely creating the demand for those stocks and thus driving prices up.