It’s about time.
Believe it or not, the U.S. stock market as measured by the
S&P 500 index hit an all-time record high last week when you include
reinvested dividends, according to Bloomberg. Now, you may not have seen that
headline in the news last week because the index itself is still 9.3 percent
below its all-time high reached on October 9, 2007.
Here are a few other interesting stats to ponder:
1)
In 2012 alone, the rise in the U.S.
stock market added $1.9 trillion to investors’ wealth.
2)
As of last week, the S&P 500
index rose 112 percent from its 12-year low reached in March 2009.
3)
Even though economic growth is
sluggish, U.S. corporate earnings are projected to reach a record high this
year. If reached, this would place earnings about 20 percent higher than 2007’s
– the year the U.S. stock market hit its all-time high.
4)
By historical standards, “The
S&P 500 is trading 13 percent below its average valuation since the 1950s.”
5)
World central banks expanded their
balance sheets by about 9 trillion dollars since the financial crisis started.
Sources: Bloomberg; Barron’s
Number 5 above is an important point to keep in mind. Easy
money has greased the world economy and now there’s talk of even more monetary
stimulus in Europe and the U.S., according to MarketWatch. What remains
unanswered is, how much of the market’s rise has been stimulated by the stimulus
and what happens when the stimulus is no longer available or effective? Can the
economy stand on its own?
Barron’s
framed it this way, “At some level, the market gets priced not simply for the
monetary-easing cure to remedy economic ills, but for that drug being
administered to a healthy patient for recreational purposes.” Translation – if
central banks overshoot and markets get addicted to the easy money high, the
inevitable withdrawal of the money drug may be painful.
CAN GOOD NEWS BE GOOD FOR
THE WRONG REASON? Last week, the government released
the eagerly awaited monthly payroll report. It showed a modest 96,000 increase
in non-farm jobs in August compared to the month before. While that number was
disappointingly low, the unemployment rate showed a surprising (and positive)
drop to 8.1 percent; down from 8.3 percent the previous month.
Here’s where it gets tricky: the drop in the unemployment
rate occurred for the wrong reason, according to The Economist. The main reason why the unemployment rate dropped
was 368,000 people left the labor force. With fewer people being counted in the
labor force, the unemployment rate looks better than it might be otherwise.
A related statistic, called the labor force participation
rate, measures the share of the working-age population either working or
looking for work. This figure fell to 63.5 percent last month – a three-decade
low, according to The Economist.
Is a declining labor force participation rate a bad thing?
According to Matthew O’Brien writing in the
Atlantic, “Less people in the labor force means, all else equal, that we
will produce less stuff in the long run. And, less stuff means we have less
wealth, lower stock prices, and fewer taxes to pay for retirement.”
So, why are people leaving the labor force? Here are a few
reasons:
·
Going back to school
·
Raising children
·
Retiring
·
Going on disability
Source: The Wall
Street Journal
Now, there’s one more big reason why people leave the labor
force – they get discouraged and simply
stop looking for a job even though they want one. Conveniently, the
government tells us there are, unfortunately, nearly 7 million of those folks
as of the end of August; that’s up from about 4.4 million near the end of 2007.
Fed Chairman Ben Bernanke recently called the unemployment
level a “grave concern” and the numbers seem to support him. Bottom line, even
though the unemployment rate dropped, it dropped for the wrong reason and we
still have a long way to go to get this country working again.
Weekly Focus – Think About It…
“Laziness may
appear attractive, but work gives satisfaction.”
--Anne Frank, The Diary of a Young Girl
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