February fades. When you consider everything we’ve been through, February ended better than we had a right to expect. When you consider the fiscal cliff chaos at the beginning of the year, the continuing problems in Europe, and the issues related to the sequester (or the mandatory spending cuts), it’s surprising we haven’t had more panic in the markets than we have. On Thursday, the last day of the month, the markets took a bit of a dive in the last few hours of the day, so the Dow ended more or less flat for the month—but it’s up more than 6 percent for the year so far. And here’s a bit of inside baseball for you. The Dow Jones Transportation Average, seen as a bet on future growth, is up 13 percent this year.
Market jitters increase. That drop in the last few hours Thursday could be a sign of profit-taking or month-end program trading. But it could also be a sign of something more, especially when we remember that the Dow fell more than 200 points on Monday. That was the biggest drop this year. The markets have gotten a bit more jittery in the past couple of weeks. The volatility index, sometimes called the “fear index,” jumped 34 percent to the highest level in several months. Part of this jumpiness we can lay at the feet of Federal Reserve Chairman Ben Bernanke, who testified before Congress Tuesday and Wednesday. He re-affirmed his commitment to quantitative easing, his massive bond-buying program. That sent gold prices up 1.8 percent Tuesday.
Asset inflation. It’s also important to remember that one reason stocks are so high is this: In an era of artificially low interest rates, investors have nowhere else to turn for a decent rate of return. But if interest rates are artificially low, does that mean stocks are artificially high? That’s the question a lot of people are arguing about now. Ben Bernanke said one of the reasons he was comfortable continuing quantitative easing is because we are not seeing any inflation. But some conservative economists say we are in fact seeing inflation, and it’s in the stock market. We’re also seeing it in rural land prices. Most of the country is in the middle of a drought, so the actual productivity of agricultural land is relatively depressed, yet we’ve seen record rural land prices in the past few years. Economists call this kind of inflation “asset inflation,” and some of them are saying that it’s an early symptom of the more conventional consumer price inflation they say is coming.
Europe’s ba-ack. One reason U.S. stocks fell on Monday was fear that a divided parliament in Italy would get in the way of the country’s reforms and hamper the eurozone’s stability. The election was the worst of all worlds, economically speaking. Former Prime Minister Silvio Berlusconi’s center-right coalition, which is opposed to austerity measures, won the most seats in the Italian Senate but didn’t win a majority. That’s a result that will likely condemn the country to a short-term and ineffective government, with new elections as soon as a year from now. Some analysts believe a Berlusconi win could cause carefully crafted budget deals between Italy and the European Union to unravel. That could bring the entire eurozone, already facing projections for economic contraction in 2013, to the point of crisis—again.