Economy Struggles, Stock Market Nears All-Time High
The job market is lousy; the housing market is stuck in neutral; the European debt crisis is far from over; congressional leaders still haven't come to a deal about the debt ceiling; and crude oil is once again hovering at $100 per barrel. Yet investors seem to be ignoring the grim news, as US stocks close in on all-time highs. What gives? Jack Otter and I thrashed it out in under three minutes!
To break it down further, here's a look at why you might feel so crappy, despite the stock market's rise:
Stocks: Sure, stocks have almost doubled from the recession lows and the indexes are within just a few percentage points of the October 9, 2007 highs, but sadly, markets are pretty much where they were a decade ago.
Corporate Profits: Feeling like companies are making a lot of progress, but you aren't? Well, a recent study ("The 'Jobless and Wageless Recovery' From the Great Recession of 2007-2009″) conducted by economists at Northeastern University lays out a potential reason: the money that companies have earned during the recovery has mostly stayed within corporate America and has not trickled down into higher wages. From the second quarter of 2009, when the recovery began to the fourth quarter of 2010, "corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent".
As a means of comparison, in the 18 months after the 2000-2001 recession, 53 percent went to corporate profits and 15 percent went to aggregate wages and salaries. In the 18 months after the 1990 recession, corporate profits actually fell by 1 percent and 50 percent of the growth in national income went to wages and salaries.
Fed Actions/Quantitative Easing: Nature abhors a vacuum and so do investors. When the Fed embarked on its $600 billion bond buying plan last year, the money that flowed into the system didn't translate into more lending or more hiring, but it sure did push up stock and commodity prices. With Ben Bernanke just hinting at the possibility of QE3 this week, stocks traded higher and gold $1600 is no longer a gold bug wish; it's a reality.
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