The benchmark Dow Jones industrial average briefly crossed 16,000 for the first time Monday, another milestone affirming that the economic recovery is roaring on Wall Street, even as the rest of the country seems to be stuck in perpetual slow motion. Wages have been flat for several years, and unemployment ticked up to 7.3 percent in October.
What’s going on? How can the stock market be rising so much when growth remains tepid and many Americans still feel gloomy about the economy?
First of all, benchmark indexes such as the Dow are not a full measure of the economy’s health. Look at China, where the stock market has been dismal in recent years, even during years when the country’s economic growth was the envy of the world.
Many credit the U.S. stock market’s recent tear to the Federal Reserve’s massive stimulus program. Jittery investors have been watching every smoke signal emerging from the Fed in recent months to see how much longer the program will last. That’s because the Fed’s program of buying $85 billion of bonds every month is designed to drive down long-term interest rates, a way of helping the housing market and encouraging companies to borrow cheaply and invest.
The big question is how much this program is benefiting the broader economy and creating jobs. Boosted by the low rates, the housing market has seen a decent recovery, but growth of construction jobs has stalled recently. The stimulus-driven bull market has helped grow many workers’ 401(k) plans, but stock ownership is still greatly concentrated among the wealthy.
Barely more than half of Americans personally or jointly with a spouse own stock as part of a mutual fund or a retirement account such as a 401(k), compared with 65 percent in 2007, according to Gallup’s annual Economy and Finance Survey.
That decline suggests that many households hurt by the recession haven’t been able to recover their footing enough to invest in stocks again. This also means they’re missing out on one of the most robust aspects of the recovery.
Even among those who do own stock, wealth is highly concentrated. The richest 10 percent of households accounted for 81 percent of the total value of stocks in 2010, according to Edward Wolff, a professor of economics at New York University. So as the stock market rises, some shareholders may feel wealthier, which could encourage them to spend more. But that’s hardly a feeling that’s broadly shared.
This has implications for the recovery since consumer spending makes up about two-thirds of the nation’s economic activity.
Stocks also have been going up because of a recent spate of good corporate earnings (the standoff over the debt ceiling in Washington barely registered for investors). Domestic profits at nonfinancial corporations rose $37.8 billion in the second quarter of 2013, according to the Bureau of Economic Analysis, the most recent data available.
But perhaps the biggest reason the rise in stock prices seems disconnected from the rest of the economy is that multinationals have become increasingly divorced from the state of U.S. employees and communities. More large firms are booking more of their sales from overseas, encouraging executives to shift operations and hire more in faster-growing markets.
In the United States, companies have been aided during the recovery by their ability to keep costs down, so that even if consumers aren’t opening their wallets very much, healthy profits can still be preserved. As a result, there’s little reason to raise wages.
Instead, companies have been stockpiling cash. In recent years, when they’ve been deploying the money, they have been using it to boost share prices by buying back stock or raising dividends.
So it’s no surprise then that when the stock market seems to be telling one story about the economy, employees and communities across the country are getting a very different view.
(One technical note: The Dow and the S&P 500-stock index both hit nominal records Monday. The Dow crossed 16,000 before closing at 15,976.02. The S&P 500 crossed 1,800 before closing at 1791.53. But adjusting for inflation, were they actually all-time highs? William Hausman, a professor at the College of William and Mary, calculates that the true all-time high for the Dow was Jan. 14, 2000. The Dow today would have to hit 16,241.40 to set a real record. As for the S&P 500, its real high was Jan. 14, 1999, at 2093.78.)