A tale of two economies

Donnie worked on the floor of the New York Stock Exchange (NYSE) for decades, but all of a sudden he was gone. His family has a long tradition of working at the stock market. Donnie's grandfather even played for NYSE's soccer team in the 1940s. In the present-day highly automated financial industry, however, there is no place for people like Donnie.

This summer, he was let go by his firm. But Donnie was not alone as many other traders and brokers have experienced the same fate over the past several months. The markets, meanwhile, went from one all time high to the next.

The Dow Jones Industrial Average (DJIA), for instance, has so far hit a record closing high 36 times this year. On December 23, the blue-chip index crossed the 18,000 threshold for the first time after figures showed the US economy expanded at its fastest pace in 11 years in the third quarter of 2014. The index just needed five months to surpass the 18,000 mark after touching 17,000 in July.

It's a "Teflon market" as it keeps rising irrespective of whether the news is good or bad. All the turbulences worldwide such as the crisis in Russia, problems in the eurozone and a plunge in oil prices, have been more or less ignored by Wall Street.

Even hints of a potential change in US monetary policy have hardly had any impact on the upward movement of stock prices in the US. Money remains cheap for now, but the market trades on expectations.

Rate hike in 2015?

The US Federal Reserve is widely expected to raise interest rates some time around June next year. It would be the first rate hike since June 2006, when the rates stood at 5.25 percent. In October, the US central bank announced an end to the quantitative easing (QE) stimulus program begun in 2008. The Fed, which launched its third round of easing, QE3, in September 2012, spent around $1.6 trillion buying mortgage-backed securities and US government bonds.

It is not the cheap money alone that drove stocks higher as the unemployment rate, too, dropped to less than 6 percent from as high as 10 percent after the financial crisis struck six years ago. Plus, US GDP grew by a remarkable 5 percent in the third quarter of this year, a rate of expansion not seen in eleven years. The reason behind these numbers is the fact that the US economy relies on itself, says Harm Bandholz, chief economist of UniCredit Research in New York.

He told DW that the strength of the US domestic market was the main cause for the recent growth. And the rise of asset prices such as stocks puts more money in the hands of US consumers, he added. The recent fall in oil prices might continue to support the nation's output growth, stresses David Welch of Bechtel, one of the oldest construction companies in the US.

Many uncertainties

"It's a monster rally," some analysts claimed. The Dow has rallied 5.6 percent over the last five trading days. But not all is well. Many traders seem to forget that the bond market saw a brief meltdown on October 15. They also appear not to be too concerned about the plunge in oil and other commodity prices as well as the wild fluctuations observed in currency markets.

Many traders say that the US economy can withstand all the foreign effects and uncertainties. It is, however, likely that there could be contagion that no one at present really sees coming. Furthermore, a huge proportion of the US population believes that they are not benefiting from the recent growth, as wages have remained flat and labor participation rates are low.

155 years ago, Charles Dickens wrote the novel "A tale of two cities." Although set in Paris and London, its central theme - the divide between the haves and have-nots - is also still very present in the US today.

Donnie is missing the good old times on the NYSE floor. Nevertheless, he found another job. But who knows what the markets might bring in 2015. But as in Donnie's case, every crisis also brings new chances.