HARI SREENIVASAN: 2013 was a year of huge gains on the stock market, with the Dow Jones industrial average gaining almost 26 percent, the Nasdaq about 37 percent.
But what about the rest of the economy?
Jeffrey Brown recorded our end-of-the-year look yesterday.
JEFFREY BROWN: Wall Street was up in 2013, way up, by any and all major market measures. In the meantime, the outlook for Main Street, economic growth in jobs, was better, but hardly great.
We discuss what is going on with Hugh Johnson, a market analyst who runs his own investment management firm, Roben Farzad, an economics writer and contributor to “Bloomberg Businessweek,” and Harry Holzer, economist and professor of public policy at Georgetown University.
And welcome to all of you.
Hugh Johnson, start us off. Just how good a year was this for stocks?
HUGH JOHNSON, Hugh Johnson Advisors: I — there’s no word that I think — no superlative that is strong enough to really describe how good of a year it was.
It’s not only a good year. It’s one of the better years we have had, if you go back and look at the records since 1890, but also I would say that the biggest thing was it was a big surprise. I don’t know anybody who had been forecasting — a lot of people had been forecasting an up year, but nobody had been forecasting anything over let’s say 12 to 15 percent, so a big year and a big surprise.
JEFFREY BROWN: Roben, was it a surprise to you?
ROBEN FARZAD, Bloomberg Businessweek: Well, you’re going to have to toast Mr. Ben Bernanke on New Year’s Eve, I can say, because when the Federal Reserve throws north of $3.5 billion at this stubborn great recession of ours, something is bound to happen in terms of asset prices.
So, we have seen real estate reflate. We have seen junk bonds have such an amazing time that I think Michael Milken would blush. And the stock market has had its best year since 1997. So, I don’t think anybody expected this. I can think back to this time last year when people were saying maybe high single digits, teens at best, but to be at almost 30 percent total return terms is really blindsiding.
JEFFREY BROWN: And, Harry Holzer, from your end, looking at it as a labor economist and more from the street level up, I guess, what did you see?
HARRY HOLZER, Georgetown University: Well, the rest of economy has not been quite that strong, as you said earlier.
Overall GDP growth has been about 2.5 percent so far this year. That’s only slightly better than the little over 2 percent that it has been throughout this recovery. Job growth was decent, again, by the standards of this recovery, about close to 200,000 a month, but not great. So I wish that those gains had been more widely shared by workers in the economy.
JEFFREY BROWN: Well, so, Hugh Johnson, so let’s pick up on some of these themes.
Hugh, first of all, what sectors were doing — I guess were all sectors going gangbusters or what did you see happening?
HUGH JOHNSON: Well, every sector, if you look at sectors of the market, was up.
But what was happening was the economically sensitive sectors of the markets — these are a little bit technical — consumer cyclical, for example, industrials, technology sectors were up. The safe sectors of the market, the sectors that do well when the economy is in a recession, or worse, such as utilities, telecommunications, consumer staples, they were up, but they weren’t up as much.
So what the message of the market was is, yes, that the economy wasn’t doing particularly well in 2013, certainly worse than it did in 2012, but the message, when you take a look at the sector performance, it was that, yes, well, just stick around because conditions are improving and 2014 will be better, maybe even considerably better, than 2013, when you look at the sectors.
JEFFREY BROWN: But, Roben, you’re suggesting that a lot of this is due to the Fed.
ROBEN FARZAD: Yes, financial aid. Think about it.
JEFFREY BROWN: Financial aid?
ROBEN FARZAD: Yes, five years of zero interest rate policy. You’re not getting anything for your money in the bank. And the opportunity cost is that over five years.
Borrowing costs for the government have been abnormally low at a time we’re running these deficits. And people are looking for returns. And when they max out the opportunities in the bond markets, they look at things such as real estate or junk bonds, and then increasingly equities.
First, it’s high-quality equities. Then it’s junk equities. Next thing you know, Facebook is worth as much as Disney. This is how these things happen and there’s this vernacular on the street. They call this is a melt-up, when everybody kind of belatedly realizes they have to get in and they pile money in, and you get a situation akin to things that we saw in late ’99, maybe for much of ’86 and ’87, and you know how those two episodes ended.
JEFFREY BROWN: Oh, so is that where you think we’re going? Is that what you — is that what you see happening?
ROBEN FARZAD: People are really worried about it to the extent that for the first time in 13 years, this volume of cash and retail money is sluicing coming into the market.
And how is that going to be resolved if there’s an exogenous shock or if Janet Yellen at the Federal Reserve has to slam the brakes suddenly in 2014? We don’t know because at no point in the 100-year history of the Federal Reserve has it thrown nearly $4 trillion at a problem.
JEFFREY BROWN: Harry Holzer, how do you see the disconnect we’re talking about? Because this run-up happens, as we’re saying, at a time of slow growth in the job market, slow growth in the economy, government shutdown, all kinds of things.
HARRY HOLZER: Well, I believe Roben is at least partly true.
Some of it has to be what you might call a financial bubble, but not all of it. Stock prices today reflect people’s expectations of corporate profits tomorrow and down the road. And I think people are expecting strong profits. They have experienced fairly strong profits even in a weak economy.
I think most economists are predicting some uptick in growth, maybe from 2 percent, 2.5 percent, up to 3 percent, 4 percent or more over the next few years,so that would certainly justify at least some of the increase in stock prices.
Of course, the other thing that we have learned is that people can do very well if you own financial assets or businesses, even when American workers aren’t being hired very much to produce goods and services here.
JEFFREY BROWN: And when we say people are doing well, one question is…
HARRY HOLZER: Who is doing well?
JEFFREY BROWN: Yes.
HARRY HOLZER: Well, the people who own those financial assets or the businesses in the American economy.
And this is a longer term. This is a story of over the last 30 years. Very powerful forces like technology and globalization have created opportunities for those owners to make money, without a lot of that benefiting the average American worker in the economy.
ROBEN FARZAD: You know, you take this line from Passover and say, what makes this recovery different from all other recoveries? I know it’s a little inside baseball.
JEFFREY BROWN: Not quite this season, but OK.
ROBEN FARZAD: No, no, I’m getting ahead of myself.
JEFFREY BROWN: OK.
ROBEN FARZAD: Never, I don’t think, in recent history have you had unemployment this chronically high for so long with the market having done this well.
There’s a stat that Obama’s bull market just beat Ronald Reagan’s. I dare say, if you canvass the man on the street, no one would guess that we beat the decade of decadence already. You’re certainly not feeling it out there.
And what is interesting to me, Professor, is at what point do you see companies feeling so flush, so hale that they see their stock prices and market capitalizations up that they have to go out and hire? What is worrisome is that there’s so much slack in the economy right now that they can name their terms and they can bring on temporary workers.
JEFFREY BROWN: All right, you answer that. Let me bring — then I will bring Hugh back in.
HARRY HOLZER: Well, I don’t think that their decisions to hire workers are going to be based on their capitalization.
Their decision to hire workers is when they need those workers to produce more goods and services. At 3 percent or 4 percent economic growth, if we get that, they will need more workers and that will mean that some of the money will be more widely spread. At 2 percent, they haven’t needed very many. And that’s why the employment numbers look the way they have looked.
JEFFREY BROWN: Let me bring Hugh Johnson back again, because you sounded like you were telling a more positive story about what is happening here.
HUGH JOHNSON: Yes, look, there’s no question that this is a different kind of a recovery. There’s no question that we’re seeing that sort of fundamental shift in the economy from a labor-intensive economy to a knowledge-driven economy.
And there’s going to be a big difference or a separation between the haves and the have-nots, but I think it’s important to remember, yes, this recovery has been very anemic, but it’s not the first time we have seen an anemic recovery coming out of mania or a bubble, the bubble, of course, being the 2004-2005 housing bubble. And we have been going through a process of eliminating all the excesses — and I really mean mortgage debt — that we built during the 2004-2005 bubble.
And that’s — that’s — that’s likely to do exactly what it is doing, which is a serve as a drag on the growth of the employment and the growth of the economy. But kind in mind, all of this, this deleveraging process, is getting healed. We’re working our way through it.
And, therefore, I think the message of the market is, we’re successfully going through the deleveraging process. We’re successfully eliminating those excesses. And in time, you are going to get better employment numbers, I think in 2014 and ’15. In time, you are going to get better economic numbers. Just be patient.
This is the way it works when you’re coming out of a mania of the sort that we saw in 2004-2005.
JEFFREY BROWN: Well, so, looking ahead, Roben first, what key indicator or indicators do you look for to know how this is going to go?
ROBEN FARZAD: I’m really fixating on the Federal Reserve.
I mean, people are — are underestimating how important this is, that Ben Bernanke’s unprecedented experiment — and now he is leaving office and Janet Yellen is coming in. Few people recall the episode of 1994, where Alan Greenspan had to come in and slam the brakes and increase interest rates.
And Wall Street took a very powerful shock. Some firms nearly failed. Now, if things speed up faster than expected and the Fed is going to have to backtrack on the promises of quantitative easing one, two, and three, is the market, which is arguably complacent now, prepared for a world where interest rates go up? Now, this has been five-plus years where interest rates have been near zero.
JEFFREY BROWN: Harry Holzer, what — what — what key indicator do you look for?
HARRY HOLZER: I really look at two, employment and earnings, and then beyond that, whose employment and whose earnings are rising?
Hugh is right that when we finish the deleveraging process, that will help the broader economy grow. Maybe if we have less madness in Washington, D.C., that will help the economy grow and reduce uncertainty. But, really, if you look at the last 30 years, except for the late 1990s, you have had output growth and productivity disproportionately concentrated in the hands of high-income people, and it has been hard.
If you look over the entire cycle from 2000 to 2007, workers shared relatively little in the outward growth that occurred. I’m hoping that is not the case this time. And, again, if the 3 percent to 4 percent predictions of growth hold true, somewhat more of it will end up in the pockets of workers, but not necessarily a lot or all.
JEFFREY BROWN: All right. All right. I’m happy to end on hope. It’s the end of the year.
Harry Holzer, Roben Farzad, Hugh Johnson, thank you, all three, very much and happy new year.
ROBEN FARZAD: Thank you.
HARRY HOLZER: Same to you.
HUGH JOHNSON: Thank you.