The rising stock market continues to confound investors. Considering the issues to be faced in just the next few months—a heated election and the fiscal cliff—how in the world can stocks be going up? One could invoke the cliché “the market climbs a wall of worry,” but that’s not a substantive explanation. The short answer is that the stock market already has hurdled over these obstacles.
But first, the electoral reality show: High drama will take place Nov. 2 when the most-watched employment report in history is unveiled. In the Super Bowl of economic statistics, Democrats will be rooting for their team to throw a downfield bomb with an estimate-beating new jobs number. The GOP, meanwhile, hopes a weak number for employment growth will force a fumble. It is pitiful to think that a 30-day measurement will be deemed critical to who becomes president, but you can bet your last dollar that the media, pollsters and campaign chiefs will be working those figures in overdrive.
The election is all about the economy, and voters are being barraged with vague arguments over how to speed GDP growth. More likely is that we will continue a current path of below-average growth for some time, a conclusion economists Ken Rogoff and Carmen Reinhart reached in their book “This Time is Different.”
The authors recently joined the political discussion about the economy because they felt their work was being mischaracterized by the candidates. Setting the record straight, Rogoff stressed their premise that the recovery is pretty much what we should expect after a major financial crisis—not a typical V-shaped economic recovery, but a longer-term, slow-growth improvement. And they doubt that policies advocated by either presidential candidate will do much to alter that path.
So why are stocks rising? Our theory is that while the populace is fixated on near-term issues, the stock market already has looked well past them. The market has concluded that our leaders, whoever they may be, will find a halfway reasonable way to deal with our deficit/debt fiscal issues. Stocks also are forecasting that, although it may take a while for the economy to fully recover, it is healing nevertheless.
The market is looking into the future and saying it doesn’t look too bad. Sure, there will be bumps along the road, but fast forward to 2020 and what might things be like? Unemployment at 5 percent? An improved fiscal picture with tax revenue and expenditures in better balance? The Fed, finished with quantitative easing, allowing interest rates to move up to equilibrium? GDP growth at 3.5 percent? The Dow Jones industrial average at 25,000?
Richard Bernstein is a market strategist worth listening to. Bernstein, who runs his own firm, believes we are in the early stages of the next bull market, describing it as the third inning.
As a neophyte investor in 1981, I remember veteran brokers who were non-believers in the rising stock market, just as it was beginning its long bull run. Back then, many investors were disbelievers after suffering through the poor-performing 1970s. They were looking back and not forward, which is what every investor should be doing.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or firstname.lastname@example.org.