Why DJIA May Slip Back to 15,000

Most media and analyst forecasts call for the Dow Jones Industrial Average (DJIA) to remain at about 17,000, or for it to plow ahead toward 20,000. The June jobs reports was good enough to lift the market, and hope that a surge in corporate profits will press the market higher for the next two months increases by the day. However, there are four reasons the DJIA could quickly shed its gains and drop back to 15,000, where it traded as recently as last October.

The first and perhaps most dangerous threat to the Dow’s advance is a major flare up in the Middle East, Ukraine or Central Africa. There is plenty of precedent for this kind of danger harming the markets. A sharp ride up in oil prices unquestionably threatens the American economy. Friction with Russia challenged trade relations with the eighth largest nation by gross domestic product (GDP). And violence could flare considerably in more than one country simultaneously.

There are not expected to be many earnings “misses” for the second quarter. The economy has apparently recovered enough so that most sectors and huge companies should do well, relative to performance for the past two years. However, the market gets anxious when several of the large companies in the United States underperform expectations within a few weeks of one another, particularly if many of them warn of a weak third quarter, or worse, trouble for the balance of the year. Certainly a series of misses among large retailers like Wal-Mart Stores Inc. (NYSE: WMT) would make traders anxious about consumer spending. Tech continues to be the most rapidly expanding sector among the largest industries. The markets would be injured if public corporations like Apple Inc. (NASDAQ: AAPL), Facebook Inc. (NASDAQ: FB) and Google Inc. (NASDAQ: GOOG) warn all at once.

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The most obvious and most simple-minded reason for a sell off is that the markets become too expensive. Since the opinion is entirely subjective, some large group of institutions would have to make the judgment almost simultaneously, even if for different reasons. The market has the habit of selling down brutally when huge investors take money off the table. It is a scene that has occurred over and over again back as far as the current indices have been the measures of market value.

Finally, GDP and unemployment are expected to continue to improve, and improve at an accelerated pace. GDP fell 2.9% in the first quarter. Based on the job additions in May and June, that figure is seen as an aberration that will be quickly washed away by the end of a brutal winter, improvement in housing and ongoing recovery in employment. Expectations are high enough that should the economy only add 200,000 jobs in July or GDP be posted at less than 2% for the second quarter, it would send waves of worry over the markets. A deceleration in either number would be a cause for undermining forecasts that the balance of 2014 will not be a strong as expected, at least as measured by the major yardsticks of economic expectations.

One or two pieces of bad news could send the DJIA back to 15,000 just as fast as, if not faster than, the pace at which it rose to 17,000.

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