TOPICS > Economy

Wall Street Enjoys ‘Rip-Roaring’ 2 Years, But Main Street’s Woes Remain

December 30, 2010 at 3:56 PM EDT
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The slow process of economic recovery is far from over for the U.S., but there were glimmers of good news in 2010's closing days as jobless benefit claims hit their lowest level in 30 months and the stock market gained ground. Jeffrey Brown gets details on where the economy stands from Bloomberg Businessweek 's Roben Farzad.
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JEFFREY BROWN: There were hints of hope today for Americans hunting for jobs or trying to keep the ones they have. Government figures showed first-time claims for unemployment benefits hit the lowest level this week in 2.5 years. That word came as the stock market neared the end of a year of strong gains.

The Dow Jones industrial average lost 15 points today to close at 11569, but it’s up 14 percent for the year. The Nasdaq fell nearly four points to close under 2663 today, but, for the year, it’s up 16 percent.

For a look at what’s behind the market’s recovery this year, even as the rest of the economy is coming back much more slowly, we turn to Roben Farzad, senior writer at “Bloomberg BusinessWeek” magazine.

Roben, welcome back. As the year ends…

ROBEN FARZAD, senior writer, “Bloomberg BusinessWeek”: Hi, Jeff.

JEFFREY BROWN: … set the context for us here. How far back have markets come?

ROBEN FARZAD: It’s unbelievable.

If you had slipped into a coma right before Lehman Brothers collapsed and just woke up right now, God willing, you would think that nothing changed. The markets are back to where they were before the contagion that — kind of the blowup, the cataclysm of September 2008.

And markets have had a rip-roaring two years. In fact, if they keep up these totals into March, it will be the best two-year bull run since 1932, but unbeknownst to most people.

JEFFREY BROWN: Well, what’s the prevailing view on why this has happened, especially given what we just said and what we keep reporting on, the bad economic news, especially the jobs numbers?

ROBEN FARZAD: It’s twofold. I think companies have really cut to the bone and into the marrow and then some. And so any kind of incremental revenue they get just looses down to the bottom line.

And employees are being asked to do a lot more with less, so productivity is really high at company levels. And, two, we sell a lot of our wares abroad. Very few people realize this. You look at a Caterpillar, or an IBM, a Coca-Cola, these are U.S.-domiciled companies, but they get upward of half their revenue in terms of the S&P 500 abroad.

And countries abroad, as we have heard about China over and over again, Brazil, India, Indonesia, they’re doing quite well. And we in fact export a lot of stuff to them. So their profits of these multinationals are somewhat outsized and increasingly getting time of day from the market.

JEFFREY BROWN: But that first part you were talking about, that suggests a lot of the disconnect we often think between Main Street and Wall Street.

You have companies laying people off or working the ones they have to the bone, as I think you just said, to increase their profits, and stock prices go up.

ROBEN FARZAD: Yes, this has come oddly full-circle, in that I think, in this economic crisis in this horrific recession, never before I think in American history have you seen such a crash at the corners of Main Street and Wall Street, where everybody was taken down.

Banks failed. Banks levered up and took on this real estate debt. And Main Street was seeing foreclosures left and right. And everybody was going down. But also never before have we seen this kind of disconnect in terms of Wall Street. And many firms had a record year last year, were paying out bonuses.

And Main Street seeing a 10 percent unemployment rate, you talked about the jobs numbers earlier. There is cold comfort in that maybe the jobless claims are stabilizing, but we’re nowhere near creating the millions of jobs that we need to do to get the unemployment rate cut back in half.

JEFFREY BROWN: All right, so when you look at what is happening in the markets, who is investing? Who is driving these markets now?

ROBEN FARZAD: Well, institutions are investing on behalf of institutions and individuals. But to the extent that individuals have self-determination, they have pulled money out of the market, I think to the tune of $90 billion since the market hit its low in March of 2009.

And they have put that money disproportionately into bond funds, which many people have argued have seen a bubble, and into cash, kind of, I want my money back. I don’t care what I get on it. After the horrors of the financial crisis and seeing banks fail and worrying if your bank was going to be seized Friday afternoon by the FDIC, you don’t want to deal with the pyrotechnics of the stock market.

There was a flash crash earlier this year that no one seems to understand what happened in May, when the market shed 900 points just in a few minutes. And I think the blame could be laid on the shoulders of these hedge funds that trade hundreds of thousands of shares every few seconds.

And the individual investor, by and large, is saying, I just don’t want to have my heart broken for the fourth time in 10 or 15 years, so I’m just staying the heck away from it.

JEFFREY BROWN: Well, are we beginning to see changes there as the market goes up and as people realize they’re not — their money isn’t earning much anywhere else, right?

ROBEN FARZAD: Indeed. And that’s the sad thing. It heartening to see people finally coming out from their bunkers and participating in the capital markets again. But it’s also — when the little guy comes in, institutions historically say that’s when they get out. That’s a sign that the mom-and-pop investor has a penchant for selling at the lows and buying at the highs, just doing the opposite of what you’re supposed to do, and not being thick-skinned enough to ride it out.

A couple of these mutual fund companies have done studies right now that if you just stuck the course and didn’t cancel your 401(k) contributions and were diversified, you would in fact be quite north of where we were before the financial crisis.

But a lot of people just didn’t see it that way. This was such a historic meltdown, there was failures left and right, the entire system was about to — was staring down the abyss, that really no one wanted to give the market the benefit of the doubt.

And I think a lot of those people right now realize that they need to take control of their retirement again and they need to do something, because certainly they’re not getting it in cash.

JEFFREY BROWN: All right, Roben Farzad of “Bloomberg BusinessWeek,” thanks, as always.

ROBEN FARZAD: My pleasure, Jeff. Thank you