GWEN IFILL: It was a record day for Wall Street today, as the Dow Jones industrial average climbed to its highest levels ever. The Dow, made up of 30 blue-chip stocks, gained nearly 126 points to close at 14,253. The previous closing record was set in October 2007, at 14,164.
Then came the housing crash and the financial crisis, sending the Dow spiraling to 6,547 by March 2009, before its long road back. Several other indexes are also rebounding. The S&P 500 was up 14 points to finish at 1,539, within striking distance of its record of 1,565 set in 2007.
We look behind the rally and these numbers with Barry Ritholtz, a market strategist, author and CEO of Fusion IQ, an online research firm. He blogs at The Big Picture. And Matt Phillips, who writes for Quartz, a digital news site that covers the global economy for Atlantic Media.
Welcome to you both.
Starting with you, Barry Ritholtz, what’s behind this sudden rise?
BARRY RITHOLTZ, Fusion IQ: Well, it’s a combination of a number of factors. First and foremost is going to be really good earnings that we’ve seen over the past couple of quarters, past couple of years.
And a lot of this has to do with the massive intervention of the Federal Reserve. They have kept rates so low that it’s made it very inexpensive for corporations to borrow and invest and it’s created a lot of liquidity, which drives equity prices higher.
GWEN IFILL: Matt Phillips, because of the intervention of the Federal Reserve, some people are calling this rebound a sugar high.
MATT PHILLIPS, Quartz: Well, they might have a point.
But one thing I would add to what Barry said is that another reason the markets seem to be catching a little bit of a tailwind here is that the housing market seems to be showing real improvement. And one way you can see that is as some of the fruit of the Fed policy, that low interest rates are stimulating people to get back in the housing market.
GWEN IFILL: Let me stay with you for a minute, Matt Phillips, because there are people who are picking up their 401(k) statements today and they are celebrating. And there are people who are back on the computer looking for a job who are not celebrating, who don’t feel like this has anything to do with them at all.
Do we have two economies here now?
MATT PHILLIPS: Well, the stock market does skew towards older, wealthier Americans. And there is a big difference between the stock market and the balance sheet of most Americans.
Median household income, which is one of the broadest gauges of how households are doing in terms of income, is still down about eight percent from its 2007 peak. So, Americans have good reason to feel that they’re still sort of trying to catch their breath after the blow that they suffered during the financial crisis.
GWEN IFILL: Barry Ritholtz, is there a disconnect under way here?
BARRY RITHOLTZ: Well, there are two economies.
But it’s not the stock market and the broader economy. It’s the global economy and the U.S. economy. If you look around the world, Europe seems to have stabilized. South America is doing well. Asia is actually improving. And when we talk about a major index like the Dow, a bunch of multinationals, or the S&P 500, the biggest market cap stocks, they derive more than half their profits from overseas activities.
So, even if the U.S. economy is a little soft — and let’s be blunt — this has been a mediocre recovery — this is not, by any stretch of the imagination, a robust economic recovery — but corporations are very lean and they’re getting profits and revenues from around the world. So there is a little bit of a disconnect because the global nature of business today.
GWEN IFILL: Domestically, is keeping unemployment rates relatively high, or at least not low, is that helping the corporate bottom line?
BARRY RITHOLTZ: Well, there’s certainly been lots and lots of layoffs right in the middle of the crisis.
They cut with an axe, not a scalpel. But the flip side of that is that the productivity gains and the deployment of technology has allowed companies to do more with less of a head count. So that efficiency factor is definitely an element. Their labor costs are just much lower than they used to be.
GWEN IFILL: Matt Phillips, Barry Ritholtz was just talking about cutting with an axe, not a scalpel, which is what everybody said the sequester debate that happened in Washington was about.
So, why — if the sequester was supposed to be so harmful to the economy — we heard Ben Bernanke said it was going to put a drag on the economy — why aren’t we seeing it here?
MATT PHILLIPS: Well, that is a concern when coupled with other things like rising gasoline prices that could put something of a damper on U.S. consumers.
But I think we can simplify things. The U.S. economy is mostly consumption, and the biggest things that Americans buy are houses and cars. There are signs that they’re buying houses again and they’re buying cars because interest rates are low. So if you try to boil it down to the simplest terms, the U.S. economy looks pretty decent.
Sequester is out there on the horizon. There are some dark clouds. But for the data that we’re seeing right now, things look OK.
GWEN IFILL: You just heard Barry Ritholtz call this a mediocre recovery. Have people regained the losses from 2007?
MATT PHILLIPS: Well, it depends on what you’re looking at.
Overall, house prices are still about 25 percent below their peak. So that is still having a negative impact on household balance sheets. But house prices have been showing decent gains lately, so that’s going to help people — that’s going to help people feel a little bit wealthier.
And I think that’s an important point. Part of the reason why the Federal Reserve has been pumping so much cash into the economy is to try to shore up asset prices. And stock markets are one of those assets. So, as you mentioned, people looking at their 401(k) statements and feeling good, that’s really important for keeping people willing to open their wallets and spend.
After the Japanese financial crisis, we’re about 23 years after Japanese stocks peaked. They are still about 70 percent lower than they were in January 1990. Now, if you wanted to feel bad, you would go back in time and look at your 401(k) statement in about March 2009, and you wouldn’t feel too good about spending.
GWEN IFILL: Barry Ritholtz, what about this idea of consumer confidence as a driver in all of this?
BARRY RITHOLTZ: You know, I don’t pay a whole lot of attention to consumer confidence, except when it looks at extreme levels.
We just saw income come out recently, and it was as bad as it’s ever been, and yet at the same day, we saw consumer spending actually ticked up. It’s — I’m fond of saying the countryside is littered with the bodies of economists who bet against the U.S. consumers. So even though we have an eight percent unemployment rate, 92 percent of the labor force is working and they’re out spending money.
I think that’s going to continue until we see the next significant downturn. Remember, these things are cyclical. There’s always a downturn in three, five, seven years off in the future.
GWEN IFILL: Well, let me ask you both this question, and starting with you, Matt Phillips.
How enduring is this? How much good news should we take from a day like today, breaking new records? We love empirical measures. We had one today. Can everyone sigh now?
MATT PHILLIPS: I don’t think so.
GWEN IFILL: I will start with Matt, and then I will come to you, Barry.
MATT PHILLIPS: I think it might be good for everyone’s morale just to sit back and take in the view, but you should be pretty cautious about trying to extrapolate where the economy is going to go from the stock market.
They are two different things. The stock market can run way ahead. The optimism in the stock market can run way ahead of where the economy is. So I think it’s true that the economy is still showing some signs of improvement, but it’s also true that the stock market might be getting a little bit too optimistic.
So it really depends. If I knew, I would be sitting in a different chair.
GWEN IFILL: Barry Ritholtz, I think I heard you begin to say it’s not time to exhale yet.
BARRY RITHOLTZ: Well, typically — I will give you a little more empirical data.
Typically, when we see a market crash like in ’08-’09, the average snapback is about 70 percent. And here we are. We’re 136 percent. So this has gone a good long way, and that’s where a lot of the credit or blame has to be given to the Fed.
The question that I think a lot of people are thinking about longer term is when the Fed finally begins to remove this accommodation, what might that do for stocks? And the expectation is, unless it’s a really robust economy, once the Fed starts throttling back, it might become a little tougher sledding for equities.
But in the meantime, it’s a pretty positive development to set new highs.
GWEN IFILL: Barry Ritholtz of Fusion IQ and Matt Phillips of Atlantic Media, thank you both very much.
BARRY RITHOLTZ: Our pleasure.
MATT PHILLIPS: Thank you.