Is the five-year stock market trend unusual?
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.
What makes this episode different?
Mainly the Federal Reserve. It has been holding interest rates so low it that 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’s 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 go higher from where they are now.
Are we at risk for another bubble?
One worrisome sign is a lot of the stock buying seems to be driven by borrowed money. The amount of money that has been borrowed to purchase shares is at a record and that sometimes is a sign of a speculative bubble building. …
Now, Robert Shiller, who is a Yale University economist and won the Nobel Prize for explaining a little bit about what bubbles are, measures stock prices against the profits a company makes over ten year averages. … And by his measure stocks are a lot higher than they have been historically but they are roughly where they were in 2003, and it turned out in 2003 that the stock market still had four more good years to go.
Are rising stock prices good for everyone else and the economy?
Of course it is great for the 20 percent of Americans who own 80 percent of the financial assets and they have a lot more money … It has triggered a surge in initial public offerings … and that can help propel growth and innovation in the future. Now, 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 a difference to them except to the extent that it lifts the spirits of business executives and prompts them to do more hiring.
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