TOPICS > Economy

U.S. Markets Continue Upswing Despite Other Factors

April 26, 2007 at 6:10 PM EST
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TRANSCRIPT

RAY SUAREZ: Now, trying to make sense of the ups and downs of the economy. On Wall Street, markets rallied again today. The Dow Jones Industrial Average hit another record today, as it continued its climb past the 13,000 mark for the first time this week. The S&P 500 is nearing its record, as well.

But is it a good barometer of the larger economic picture in the U.S.? The housing market looks weak; new home sales rose slightly last month, but less than expected. Meanwhile, in March, existing home sales took their biggest tumble in years. Also hitting the pocketbook: Gasoline prices are rising again, now averaging $2.91 a gallon.

Joining us now for some analysis are Sam Stovall, chief investment strategist at Standard and Poor’s, and Boyce Watkins, assistant professor of finance at the Whitman School of Management at Syracuse University.

And, Mr. Stovall, what new highs, both in the broad market measures, like the S&P, and the more popular ones, like the Dow, reflect, if anything, about the state of the wider economy?

SAM STOVALL, Standard and Poor’s: I think basically, Ray, it says that there is reason to be confident, at least, that possibly the worst is behind us for all those factors that you had mentioned, that we’re probably in the lowest quarter for the housing situation. Possibly we have a contained subprime environment that, while oil prices and gasoline prices are fairly high, there’s a lack of surprise element involved in this.

Also, that corporate earnings, even though they are decelerating, basically Wall Street is saying that we can look beyond this valley and look into 2008, in which we do see an acceleration in economic growth, as well as corporate profits.

RAY SUAREZ: Professor Watkins, why are the market indices surging when there are signs of weakness in other parts of the economy?

BOYCE WATKINS, Syracuse University: Well, the word for today really is expectations. If you ask a guy why he’s happy that his daughter got a C-plus on a report card, he’ll say, “I was ecstatic, because I thought she was going to get a D.”

The fact is that two-thirds of the companies in the Dow Jones Industrial Average met or exceeded their earnings expectations for this quarter, which makes a difference. The market’s driven by expectations.

The second word for today is international. The average Dow Jones Industrial Average company gets 41 percent of its sales from overseas markets. And if you add that to the fact that the dollar is declining in value, which opens up those markets further for American products, you’re going to see the surge that you’ve seen in the market recently.

Moving extra money into markets

Sam Stovall
Standard and Poor's
I'd like to recommend that people take that opportunity to rebalance their portfolios, ... not change the kind of investment plan that they have, but rather reset the dial so that they can force themselves to buy low and sell high.

RAY SUAREZ: Sam Stovall, is there money going into the markets that is going there because it's not really apparent where else to put it?

SAM STOVALL: Well, that's a good question, because, when you look at bonds, the bond yields do appear to be creeping higher from a technical standpoint. Possibly it does appear that the bull market has ended for bonds that's been around since the 1980s.

Also, when you compare the earnings yield for the S&P 500, or basically how much it pays out in earnings, as compared with how much bonds pay out in yields, you'll find that stocks look very attractive as compared with bonds over the last 20 years.

RAY SUAREZ: So is there a point at which the fundamentals finally intrude, where companies not making money, where other sort of discouraging words out there on the horizon take even that money that's looking for a place to go and say, "Maybe not here"?

SAM STOVALL: Well, I think it's a good question, because, when you look at periods of both euphoria and despair, I'd like to recommend that people take that opportunity to rebalance their portfolios, not change their overall structures, not change the kind of investment plan that they have, but rather reset the dial so that they can force themselves to buy low and sell high.

Housing market slump

Boyce Watkins
Syracuse University
And what people have to also remember -- and I hope people are listening to this -- is that America really, in my estimation, is really on the verge of a retirement crisis unlike anything that we've ever seen before.

RAY SUAREZ: Professor Watkins, one of the not-so-bright spots in the economy is the housing market. But hasn't that been one of the sectors of the economy that's driven a lot of other things that, at first glance, don't even have much to do with housing?

BOYCE WATKINS: Well, that is important, absolutely. The slump in the housing market certainly plays a role.

But what people have to always remember is that the entire economy is not built on the housing market. And the second thing people have to understand is that the Dow Jones Industrial Average tends to be the index that we fixate on, but it's not necessarily the index that most reflects what's going on in the economy.

Finally, what's also true, that a lot of Americans forget, is that we live in an economy that is being more and more influenced by globalization. And so, effectively, when you look at the fact that companies are working to maximize shareholder wealth by any means necessary, and you add that to globalization, which increases opportunities to reduce costs by finding labor overseas and things like that, you're going to find that this allegedly inextricable link between the American economy and these indices in the stock market is going to weaken through time.

So people have to keep that in mind when they analyze what's going on with the stock market, and trying to connect that to the broader U.S. economy.

RAY SUAREZ: But, Professor, if you're one of those Americans who isn't really thinking about globalization, but you have used your house and the equity in it to buy other things, like cars and vacations, if you've cashed out your 401(k) when you've changed jobs rather than rolling it over, has this been a tough time for you?

BOYCE WATKINS: Well, absolutely. And what people have to also remember -- and I hope people are listening to this -- is that America really, in my estimation, is really on the verge of a retirement crisis unlike anything that we've ever seen before.

When I spent time at the Center for European Economic Research this summer, basically my research uncovered the fact that Americans are horrible savers. In addition to that, you have companies getting rid of their pension plans, Social Security is dying, the cost of health care is going up, the population's getting older, and that older population is going to have its productivity on the backs of a dwindling youthful population, which really, in my opinion, sort of pulls together all the ingredients of a retirement crisis.

So that person you mentioned who's cashed out their 401(k), they might want to reconsider their investment strategy, because it may become every man for himself 10, 20 years from now.

Planning for the financial future

Sam Stovall
Standard and Poor's
If you even look at the population, ... if you were to break them into quintiles, you'll find that the top 20 percent represent about 40 percent of consumer spending in this nation, whereas the bottom 20 percent represent only about 8 percent.

RAY SUAREZ: Sam Stovall, it doesn't look too good from what Professor Watkins says, looking down the road.

SAM STOVALL: Well, that would be true, if what people continued to do was basically spend their retirement money today and not prepare for their financial future.

I guess it's like the old adage of the grasshopper and the ant. I think more people should be practicing the activities of the ant by putting money away and planning for their financial future, because what we do find, over the long term, is that it's risky not investing in stocks over the long term, if you're trying to outpace inflation.

And I think that's one reason why we did have the Pension Protection Act that was put forth last year, where it requires companies where their employees do engage in the defined contribution plans that they basically have to contribute and are automatically put into a plan that does have exposure to equities.

RAY SUAREZ: Well, Sam Stovall, some of the gross figures, the sort of "America at cruising altitude of 30,000 feet" figures, don't tell a happy story. Foreclosures are up; delinquencies are up; the value of people's homes is down.

But I'm wondering if that overview doesn't really get at the fact that there are some places in the country where things continue to go really well, while there are others where things are stagnant?

SAM STOVALL: Well, that's absolutely true. If you even look at the population, the income groups, if you were to break them into quintiles, you'll find that the top 20 percent represent about 40 percent of consumer spending in this nation, whereas the bottom 20 percent represent only about 8 percent.

And certainly that bottom 20 percent is where we have this subprime mortgage problems, et cetera. But I don't also think that we are looking at a stock market that is trading at levels last seen in the early 2000s. Right now, we're actually trading at valuations that are about half what they were seven years ago.

'Average American is struggling'

Boyce Watkins
Syracuse University
But the fact is that we can't assume that every part of the economy is doing well just because the Dow's doing well.

RAY SUAREZ: So, Professor Watkins, who's doing well and who's doing badly?

BOYCE WATKINS: Well, obviously, those who are impacted by the subprime lending market are struggling a little bit. I would argue, as well, that, if you really look at real wage increases or lack thereof, I would say that the average American worker is struggling a little bit.

I think that, you know, he made a very good point that, when you talk about what's going on with the subprime lending market, that isn't the entire economy as a whole. But the fact is that we can't assume that every part of the economy is doing well just because the Dow's doing well.

But at the same time, you must also recognize the fact, for example, that the Commerce Department recently released numbers on durable goods orders that were quite favorable. So, overall, as an economy, on average -- and average is a very loose and scary term to use -- everyone's doing OK.

But the other thing that people have to also understand is that the culprit of volatility remains hidden around the corner. Remember, we had a 416-point drop in the Dow in one day, which was absolutely unbelievable, and there's nothing saying that can't happen again.

RAY SUAREZ: Boyce Watkins and Sam Stovall, gentlemen, thank you both.

BOYCE WATKINS: Thank you for having me.