The Dow Hit An All-Time High And The ECB Warned On European Banks

The Dow Hit An All-Time High And The ECB Warned On European Banks

over 3 years ago3 mins

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This is no small thing: the Dow Jones Industrial Average index hit an all-time high this week 🙌

What does this mean?

The Dow is one of the most important US stock indexes, but it’s a slightly different beast than, say, the S&P 500. For starters, its value is determined by its constituent companies’ share prices, rather than their market capitalizations. In other words, higher-priced stocks have more of an influence than their lower-priced rivals. Secondly, it tracks the value of far fewer companies: 30 to the S&P’s 500 🇺🇸 And since they’re a cross-section of American industry as a whole, they benefited from the news that the presidential transition is now officially underway. That led to a surge in their share prices, tipping the Dow over the 30,000 mark for the first time ever.

Dow closes above 30,000

Why should I care?

The prospect of an end to the pandemic has analysts tripping over each other to tell you how to set up your portfolio for maximum gains. They don’t necessarily agree how to do it, but they do agree on one thing: it’s time to ditch the stocks that did well in 2020 and rotate to something new 📆 As for what that “something new” is: plenty of them are backing cheap-looking value and economically sensitive cyclical shares, which have been gradually catching up with the Big Tech stocks that led the rally earlier this year.

Stocks in Europe have outperformed since Pfizer’s announcement

There’s an old truism that investors trade less in the lead-up to Thanksgiving, making markets more vulnerable to sudden shifts 🦃 But 2020 has no time for your truisms: investors who wanted a piece of the rally traded 75% more shares on the Monday and Tuesday than they did the same time last year. Looks like it might’ve taken some trading platforms by surprise too: both Vanguard and Merrill Lynch reported platform outages on Wednesday.

Thanksgiving

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The ECB Warned On European Banks

ECB image

The European Central Bank (ECB) warned on Wednesday that European banks are driving headlong toward weak profits and big losses in 2021 🇪🇺

What does this mean?

The ECB publishes a review of the biggest risks facing the eurozone’s financial system twice a year, and banks were top of its mind this time around. See, Europe’s companies have been borrowing significantly more money during the pandemic, and they’ve relied on government and ECB support to pay off the loans 💶 The worry now is that they won’t be able to do so without that support – and that banks haven’t put enough money aside for when that happens. Throw in record-low interest rates that limit the amount that banks can make on those loans, and they could see their profits – and their ability to lend – put under serious pressure.

European Central Bank – deposit facility rate

Why should I care?

Back in March, the ECB banned European banks from paying investors dividends in hopes it’d help them outlast the pandemic 🚫 But they’ve recently been lobbying the central bank to lift the ban, arguing that it’s putting off income-hungry investors and damaging their share prices – which are down by more than 20% this year. The ECB didn’t commit one way or the other in its report, but it did admit it’d be difficult to keep the restrictions in place beyond the end of the year.

Changes in eurozone banks’ profitability

The ECB highlighted a few other risks to the eurozone in its report too. For one, it said the markets are due for a “correction” soon – a sentiment the US Federal Reserve echoed just the other week 🏦 For another, the central bank warned of rising debt levels across governments, companies, and households. And it’s not wrong: the Institute for International Finance just announced global debt reached a record high of $272 trillion last quarter – and said it could be almost four times the size of the global economy by the end of the year.

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