WHY STOCKS ARE HIGHER THAN EXPECTED

A question that people have asked me quite often over the past few years is this: “If the economy is so bad, then why is the stock market so high?”

It’s a legitimate thing to ask. In October of 2007 the Dow reached an all-time high of 14,164. During the Great Recession, the market bottomed out in March of 2009 at 6,547. In the past 52 weeks we’ve seen a peak of 13,661 and, as I write this column, we’re at 12,570. Those aren’t pre-Recession levels, but they’re still pretty good considering what the global markets went through.

No one would have expected the Dow to double - let alone surpass just 10,000 -- in just a couple of years. It doesn’t match what has really happened in the economy. Most Americans are just as pained and worried as they were during the Recession; such is to be expected when the widely-accepted unemployment rate has languished around the depressing 8% mark. That number, which in itself doesn’t reflect reality, is only that small because so many people have dropped out of the workforce or have lowered their expectations to part-time employment. Taking into consideration those individuals through the U6 unemployment rate, true unemployment is really at 14.6%.

You can see why people are confused by the inverse relationship between economic indicators.

So, what does account for the stock market’s ascension?

The answer is simple. It’s the only game in town.

It used to be that the working man could plan for his future by dabbling in one or more of the following: investing in the stock market, buying real estate, acquiring government debt, or buying certificates of deposit. Now, only the first one is a legitimate endeavor because the other 3 are just shadows of their former selves.

Consider real estate. The primary cause of the Great Recession was the bursting of the housing bubble. People bought expensive homes that they shouldn’t have (while lending institutions and the government enabled them) in hopes of continued growth in the market, believing they could turn around and sell the home a few years later for many dollars more. It wasn’t long before it was realized that they couldn’t support their investments: Rising energy and food prices socked the economy in 2007. That caused job cuts and cutbacks which in turn affected those who had taken on the exorbitant home payments. Housing prices plummeted and homeowners who were underwater abandoned ship. Because of that sting, people are hesitant to buy first and second homes again, banks won’t allow them to, and, above all, many people are incapable of doing so in today’s world because of high unemployment and lower wages.

Government bonds and notes used to be solid investments, too. Someone could buy the debt from the government and, years down the line, reap the rewards from a solid yield in the 5 to 9 percent range in the 1990s and a middling 3 to 6 percent during the 2000s. Now, a 10-year Treasury note has a yield around 1.5 percent. To buy them at such low rates, you’d have to be either a fool, ungodly conservative, retired or worried about an all-out economic collapse. What has contributed to this destruction of the bond market is the willingness of the Federal Reserve to continue to buy-up debt in an effort to keep the federal government afloat.

The Fed has also been complicit in the loss of gains on Certificates of Deposit (CDs). Borrowing from the Fed and other banks is too easy for financial entities thanks to historically low rates, so banks no longer have a reason to lean on consumers for borrowing. Back in the 1980s your average investor could make a killing on CDs – 6-month returns were as high as 17 percent and 5-year CDs were at 12 percent. Now, banks market to their clients 2 percent yields like they’re the best thing going.

So, that leaves the stock market as the only legit outlet for retirement and investment, especially for those in their 30s and 40s. The markets rose like a phoenix because of an ongoing influx of cash by private investors, 401(k)s, public sector pension plans and more. Due to job losses and other ground level economic issues –  such as Baby Boomers who are coming of retirement age, pulling money out and socking it away in ultra-conservative notes and bank accounts  - the annual input may not be as high as it was in 2007, but nonetheless, it continues to the tune of hundreds of billions annually. Any system receiving such an influx of cash is certain to prosper, no matter the conditions.    

Gasport resident Bob Confer also writes for the New American magazine at thenewamerican.com. Follow him on Twitter @bobconfer


This column originally appeared in the 19 November 2012 Greater Niagara Newspapers