March 5, 2013
RAISING THE QUESTION OF WHETHER W WAS OUR GREATEST PRESIDENT:
Record High Close for Dow, Spurred by Fed and Profits (PETER EAVIS, 3/05/13, NY Times)
Posted by Orrin Judd at March 5, 2013 6:05 PMAfter the crash of 1929, it took 25 years for the Dow to get back to the nominal level it plunged from. The severe economic contractions of the 1930s, during which scores of banks collapsed, weighed heavily on stocks.But one essential government institution did things differently after the 2009 low point, and that has bolstered the stock market. The Federal Reserve has added more than $3 trillion of monetary stimulus to the economy and more than $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy.Perhaps as important is the psychological shot in the arm: when investors believe the Fed is providing a systemic backstop, they will be more likely to get back into the market, and stay there."The Federal Reserve is here, and is going to do everything possible to support this recovery," Ben S. Bernanke, chairman of the Fed, said in an interview with "60 Minutes" in March 2009. It is probably more than coincidence that stocks began to recover strongly after that broadcast."Central banks do matter. Central banks have always mattered," said David Rosenberg, a chief economist at Gluskin Sheff and Associates, who started work as a Wall Street economist on the day of the 1987 stock market crash. "So long as the Fed is in an accommodative mode and the economy is out of recession, the odds are that you will have a bull market."That's not to say that the Fed's largess is the only reason stocks are up.Company profits, which theoretically provide the basis for investing in stocks, have also surged. "Corporate earnings have been doing very nicely, thank you," said Alan S. Blinder, professor of economics and public affairs at Princeton University. In aggregate, companies in the S.&P. 500 have not reported a decline in earnings since the third quarter of 2009.The focus on profits explains why the stock market can be doing well while most people are not experiencing a resurgent economy. A bet on an index like the Dow is effectively a narrow wager on the profits of 30 companies, not necessarily the economic health of average Americans, said Mr. Blinder. "Corporate profits have done better than median wages," he said.The big question is whether the stock market can keep going up from here.One determinant is whether stocks are seen by traders as relatively expensive, and therefore vulnerable to a sell-off. Robert J. Shiller, a professor of economics at Yale University, has built a model for gauging whether stocks are cheap or pricey. Right now, stock valuations are above historical averages, but well below the stratospheric highs they've reached in bubbles, he said. According to his model, stocks are signaling that they can return about 3 to 4 percent a year.