Historic run for stocks ends on high note
News Analysis
(MoneyWatch) The Dow Jones industrial average hit a record high this week, capping its historic run by gaining 68 points to close at 14,397. Until the latest run-up in stocks, that put the previous mark of 14,165, reached on Oct. 9, 2007, in the shade.
Let the good times roll? Not quite.
The significance of the market's nearly 120 percent rise from the depths of the financial crisis in March 2009 depends on your financial situation. In large part, that's because the stock market is not the economy and the economy is not the stock market.
The Economist notes, "It is tempting to attribute the strength of the Dow to optimism about the American economy. Tempting, but wrong. Studies have shown almost no correlation between GDP growth and equity returns.... this rally in the Dow has been accompanied by the weakest GDP growth of all the bull markets since the Second World War."
Dow jumps to its highest level ever
Rather, the stock market reflects the collective opinion of investors about the future ability of companies to make money. Clearly, the private sector is making money, often loads of it as profits reach record levels. From this perspective, the more than doubling of stocks since their housing bust lows is justified.
Corporate earnings have risen at an annualized rate of over 20 percent since the end of 2008, though much of the boost came early in the recovery. Still, companies were able to grow their earnings at a better than expected pace in the last quarter. The profit surge has allowed share prices to appreciate and for companies to increase their dividend payments to stockholders. According to industry estimates, S&P 500 companies are expected to pay out $300 billion in dividends this year.
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Other factors beyond strong corporate results are propelling the market. Europe is not currently on the brink of disaster, with the most pressing threat from the region's debt crisis having at least temporarily abated. China also appears to have avoided an economic "hard landing," while Japanese officials have started to address the country's 20-year economic stagnation.
But the biggest driver of the stock market's advance is the Federal Reserve, which has kept short-term interest rates at all-time lows since December 2008 and last September launched a third round of bond buying. The central banks has pledged to continue its easy money policies until the nation's unemployment rate drops to 6.5 percent.
Dow record high: What's behind the jump?
While the Fed has said that low rates are intended to spur economic activity, they have another important aspect. Central bank-induced low rates can distort investment allocation decisions. Many investors, especially large institutions, are scanning the landscape and deciding that stocks are a better alternative to cash, bonds and commodities.
If you own stocks, these developments are welcome. But our financial lives and the economy are more than the value of our investment accounts. The economy has been growing only about 2 percent annually for the past few years, which is lower than the post World War II average.
"Hamburgers, homes and hard drives" behind Dow high
Still, if growth remains weak, there is reason for hope. The housing market, which was at the epicenter of the financial crisis, has finally turned around. After peaking in 2006, housing is no longer be a headwind for the economy and instead will contribute to growth. Exactly how much is uncertain -- home prices remain down about 30 percent nationally, which has put a dent in the average American's balance sheet. But the real estate market does finally appear to be on the mend.
The Fed said this week that household net worth was up 9 percent from year-ago levels. Net worth peaked at $67.4 trillion in the third quarter of 2007, then collapsed in early 2009. By the end of 2012, it had risen to $66.1 trillion.
That means that despite the gains in the stock and housing market, Americans' total net worth is still $1.3 trillion below where it was in 2007.
With companies making money, the economy growing and the housing market back on its feet, why aren't people doing better? The answer lies in the nuance of the recovery. Dean Maki, chief United States economist at Barclays, told the New York Times that "as a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966."
In other words, the fruits of the recovery have gone disproportionately to companies and their shareholders. In fact, workers have seen their incomes shrink since the beginning of the recovery. According to Sentier Research, median annual household income in January 2013 was $51,584, 4.5 percent lower than the median of $54,008 in June 2009, when the officially recovery began. That underlines the disconnect between the stock market and the plight of average Americans.
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Yes and no. Prudent investing and an understanding of fundamentals and psychology will help you along. The real problem with Wall Street today is the sheriff has been asleep for over 10 years and there are many trying to keep him(her) asleep. The market WAS/IS rigged by the players through Congress almost as bad as it was before the Great Depression. It has only been partially fixed with Obama. The GOP has tried to stymy the repair but don't forget that some of Obama's biggest donations came from Wall Street so one needs to consider how anyone in Washington really wants to fix it. They game the system and the little guy gets the bill.
Investors, and people who might normally have savings accounts, cd's, bonds, are going along for the ride. Gold has hit a ceiling and silver has taken a beating because the market is doing so well. This is all being manipulated and anyone with money is happy to sail along for the ride.
They're putting 7% trailing stop limits on all their equities and watching the cash come in if their stocks are performers. If you had bought guns (smith and wesson), ammo (ATK), beans (Hormel), toilet paper (Kimberly Clarke), mac n' cheese (Kraft), and shampoo and razor blades (Proctor and Gamble), you'd be making a fortune. However it doesn't portend a great futire for the economy. The housing rebound is also being manipulated as banks have not been foreclosing according to a federal directive. That has reduced the supply and raised the home value price. Why is that never reported?
The market is about 50% hard numbers and 50% psychology. If you understand both you might do OK although some luck probably (no, certainly) helps as well. It helps to have been around a number of years to figure out how people react and recognize a boom/bust cycle. My only regret is that I didn't buy more Halliburton and perhaps gold, although gold is purely psychological. Thank you Rush for stirring up the weak minded about gold even though you yourself are a complete travesty of a human being and about as anti_American as they come.
Even at 16/17T the debt is manageable but stupid in that we got into it in the first place. The real danger is in medical costs especially for older retirees (which I will be a recipient of sooner then later)SS is very predictable and not the threat many think it is. If you're young make every effort to target SS being at most 30% of your retirement portfolio. You can do it, it just takes discipline and some forward thinking. It also means you probably can't have everything the Jones have because in reality they are probably borrowing to have those things. Pay for what you want - THAT is fiscal responsibility.
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Nothing destroys a country faster and more thoroughly then massive income disparity.
The market will rise to 16,000 by the year's end.
All the Fed's pumping money into this ponzi scheme is one of the root causes for this "rise" in the market.
Bush did it. So is Obama. Any president, correct me if I'm wrong, should be able to put in an executive order and halt this.
Based on how many people are hurting, is this system worth floating, much less saving?