A breather, or a case of the nerves? We’ve seen a record run-up in the markets since the first of the year. The Dow is up about 7.5 percent from Jan. 1. But this week—to use the financial journalists’ term of art—traders took a breather, though it could have been a case of the nerves. News from Cyprus that the government would tax bank accounts was the bad idea heard round the world. But the Dow had dropped a combined total of nearly 100 points on the Thursday and Friday before the Cyprus news broke. That drop was likely the result of a bit of profit-taking.
Contained or not contained? That is the question. But global markets were also down this week. There’s no doubt that Cyprus caused that. And Cyprus had to close its banks to prevent a run. Most analysts think the Cyprus situation will not be a huge factor long-term, except for in Cyprus itself, which has seen its banking industry take a huge credibility hit, and it faces expulsion from the eurozone if it can’t get its house in order. But French Finance Minister Pierre Moscovici is one of those who doubt there’s any risk the problems of Cyprus will spread to other European economies. He said the situation in Cyprus is unique: Cyprus is a very small economy with a disproportionate large banking sector. He also said most of those who might be hurt are Cypriats themselves and Russians who park excess, discretionary funds there.
Good news elsewhere. So the markets fell, but didn’t panic. It helps that most of the other economic news this week was good. The Federal Open Markets Committee met on Tuesday and Wednesday, with Fed Chairman Ben Bernanke holding a press conference at the end of the meeting. He was generally upbeat, though he said the Fed’s aggressive measures—primarily quantitative easing, or the printing of money to buy bonds, which lots of analysts fear will ultimately create inflation in the economy—would continue in order to prevent backsliding in the economy. And the housing market produced good news this week. Walter Molony is a spokesman for the National Association of Realtors. He said sales of previously occupied homes jumped in February, and we’ve had 12 straight months of month-over-month growth. On Thursday, the Labor Department said first-time claims for unemployment rose by 2,000, but that was less than expected. The monthly average, which smoothes out week-to-week variations, fell to the lowest level since February 2008.
So are we out of the woods? I wish it were that simple. The volatility index, or VIX, often called the “fear index,” was up this week, though it stayed well below panic levels. The situation in Cyprus, despite what the French finance minister said, is probably not contained. It will take a couple of weeks to know if the Cyprus banking crisis will cause Russian or other dominos to fall. And despite these improvements in the employment picture, unemployment is still at 7.7 percent, which no one says is a healthy level. Even Ben Bernanke said it would be 2015 before unemployment is less than his target of 6.5 percent. And we haven’t even talked about the ongoing federal budget crisis in Washington, where the debt keeps rising and they still don’t have a deal. All of which is to say that we’re far from out of the economic woods.