NPR Story
5:04 am
Tue March 11, 2014

Will Stocks' 5-Year Trajectory Keep Going Higher?

Originally published on Tue March 11, 2014 10:28 am

Transcript

RENEE MONTAGNE, HOST:

It's MORNING EDITION from NPR News. I'm Renee Montagne.

DAVID GREENE, HOST:

And I'm David Greene. Good morning.

The stock market flinched a bit yesterday over fears about the tension in Ukraine and new signs of an economic slowdown in China. But overall, the stock market has been climbing steadily upward for five years now. To find out why and what and what this might tell us about the economy, we turn as we often do, to David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributor to The Wall Street Journal.

David, welcome back to the program.

DAVID WESSEL: Good morning.

GREENE: So is his five-year upward trend on Wall Street unusual?

WESSEL: It is unusual. Stock prices are up about 150 percent since they touched bottom in March 2009, in the worst days of the recession. Adjusted for inflation, the Dow Jones Industrial Average has now busted the all-time record, which was set in 2000 before the Internet bubble burst. Now, of these 12 bull markets, as they're known - that's what an episode of climbing stock prices is called. The 12 of them since World War II, only half lasted five years. And only three made it to the sixth birthday.

Now, of course, every episode is different. this one in particular, and there's no reason to believe these things die of old age.

GREENE: Well, what makes this episode different?

WESSEL: Well, mainly the Federal Reserve. It has made holding interest rates so low that it makes holding money in cash or bonds very unattractive. That pushes people to buy stocks or real estate or other kinds of assets. Now, to some people that suggests that once the Fed pulls back, when they think the economy is healthy, then the stock market will turn down. And, indeed, these people say: Look, the Fed has been pulling back a little bit and so far this year the stock market has been going up and down, but it's not much higher than it was at the beginning of the year.

Other people say: Look, as long as the economy remains healthy and, importantly, profits of companies remain fat, there's no reason that stocks can't continue to higher from where they are now.

GREENE: Well, and I guess that's going to depend on whether, you know, people on Wall Street keep buying. Which makes you wonder, I mean who is doing the buying?

WESSEL: Well, it's interesting. It really is across the board, both big investors and small investors are powering into stocks now. In 2009 and '10 and '11, investors took more money out of mutual funds than invest in stocks than they put in. But last year, that trend reversed. Stock market funds received a record-busting $172 billion in net inflows.

And one worrisome sign is that some of this stock-buying seems to be driven by borrowed money. The amount of money that's in borrowed to purchase shares is at a record. And that sometimes is a sign of a speculative bubble building.

GREENE: Well, and bursts obviously are something that can be very difficult to be very damaging to an economy. I mean is there any way to tell whether there is a dangerous bubble building?

WESSEL: I don't think there's a really definitive way. Of course, once a bubble bursts then you know you're in it.

GREENE: You know it was there, yeah.

WESSEL: Right. Right.

(LAUGHTER)

WESSEL: Now, Robert Shiller, who's a Yale University economist, who won the Nobel Prize for explaining a little bit about what bubbles are, measures stock prices against the profits a company makes over 10-year averages. And he keeps his metric. And by his measure, stocks are a lot higher than they have been historically. But they're roughly where they were in 2003. And it turned out, in 2003, that the stock market still had four more good years to go.

GREENE: Well, I mean these rising stock prices, David, I mean good obviously for people who own shares on Wall Street. Do they mean something, as well, for everyone else and for the overall economy?

WESSEL: Well, of course, it is great for the 20 percent of Americans who own 80 percent of the financial assets.

GREENE: Yeah.

WESSEL: And they have a lot more money, that's why the companies that sell fancy watches and pricey cars doing well. It has triggered a surge in initial public offerings, in which young high-tech and bio-tech companies go to the market to raise money. And that can help propel growth and innovation in the future.

A rising stock market is better for the economy than a falling one. But for those people who live paycheck-to-paycheck, it doesn't make a heck of a lot of difference to them, except to the extent that it lifts the spirits of business executives and prompts them to do more hiring. That would really makes a difference.

GREENE: Which is something they can actually make a difference in the economy.

David, thanks as always. Good to talk to you.

WESSEL: You're welcome.

GREENE: David Wessel, he's director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, and also contributing correspondent to The Wall Street Journal. Transcript provided by NPR, Copyright NPR.