Relationship between rising stock prices and higher consumer spending.
Economists’ main concern with the wealth effect is that as the value of stocks increase people will become in a sense too rich, causing higher spending, which in turn would put upward pressure on productive capacity and cause inflation.
Supporters of the market valuation or market capitalization weighting average (NASDAQ and S&P 500) believe the Dow is flawed.
Based on this data collection, the DJIA in recent years follows this trend….
Dow Jones Industrial Average 1980-2006 Closing Price Year
Federal Funds Rate 2001-2007 Year Interest Rate
Comparing the DJIA with the Federal Funds Rate
DJIA has been volatile and increased exponentially for the past twenty years.
DJIA has recently climbed up to an all-time high on January 11th, 2007 with a closing price of 12,514.98.
The federal funds rate drops at about the same time as the DJIA during the September 11th attacks, however instead of recovering in between the Iraq war, the federal funds rate continues to decrease and stay near or below 1%.
Consider how increasingly high the DJIA has been in the past year compared to the stable federal funds rate of 5.25% the Federal Reserve has maintained since June of 2006.