JUDY WOODRUFF: This has been a notable week for the stock markets, particularly for the Dow Jones industrial average, the benchmark index that’s closely monitored and that’s reaching new milestones.
But there are questions about what’s behind the rally of late and whether it reflects the fundamentals of the economy.
NewsHour economics correspondent Paul Solman hit the trading floor yesterday in search of some answers.
The story is part of his ongoing reporting Making Sense of financial news.
MARK OTTO, J. Streicher & Co:Up, up and away, yes.
PAUL SOLMAN: Mark Otto at the New York Stock Exchange yesterday, when the Dow ended above 16000, another record for the headline index of 30 major companies.
Other stock indexes are hitting new highs as well, as companies continue to report healthy profits and recovery chugs along.And, yet, the recovery is weak and unemployment high.
Even on the exchange floor, there was little enthusiasm.Why?
MARK OTTO: I think everyone’s a little bit worried.I mean, you hear the conversation of a bubble possibility coming up more often now.
PAUL SOLMAN: And, says Otto, voicing a common complaint, that’s because of the Federal Reserve in Washington.
MARK OTTO: Fed stimulus has really propelled the market higher.Really, that’s the debate that’s going on right now as we close in to the end of the year.
PAUL SOLMAN: But when you’re buying a share of a company, you’re buying a stake in or a claim on its profits, right?
MARK OTTO: Actually, since Washington, D.C., and the markets have become more intertwined, I believe that traders are looking at stocks not only for earnings and the basis of beating expectations; it’s also the fact of what’s propelling those stocks.
DOUGLAS DACHILLE, First Principles Capital Management:The Federal Reserve is trying to stimulate economic activity.
PAUL SOLMAN: Wall Street money manager Doug Dachille, whose office literally looks down on the New York branch of the Federal Reserve, agrees.The Fed’s post-crash policy of easy money, he says, has driven up the price of assets like stocks, instead of prompting investment and spending, as hoped.
DOUG DACHILLE: Why you’re here today talking to me is, you’re questioning this whole thing.That’s the problem.People are questioning it because they know the asset valuations have been driven by a monetary phenomenon.They have been driven by the Fed, so they’re not confident that those asset valuations will be sustained and supported, because they think it may be a house of cards.
PAUL SOLMAN: To boost the economy, that is, the Fed may have wound up goosing the stock market by creating money for the purpose of keeping interest rates down.
So, the Fed, by keeping interest rates…
DOUG DACHILLE: At zero — at close to zero.
PAUL SOLMAN: … close to zero forces people to buy stocks instead.
DOUG DACHILLE: Buy stocks, and then that person who used to own stocks, when he gets out of stocks, you know what he does?He looks for alternatives.
PAUL SOLMAN: Alternatives like the new housing boom or, amazingly to Dachille, online lending clubs.
DOUG DACHILLE: We just went through a credit cycle where you were afraid to lend against an asset supported by — to a person supported by a house.Now you’re lending unsecured, no collateral, no nothing to Joe on a Web site.
PAUL SOLMAN: And also lending to stock investors, whose margin debt to buy shares on credit has been hitting record highs.
The last record was set in 2007, a few months before the Dow’s previous high watermark.But for all the talk of the Fed’s role, Dachille agrees that there’s an alternative way to understand a record Dow and higher profits: a shift of power from workers to owners.
Another explanation is that these days labor is at the…
DOUG DACHILLE: The mercy of capital.
There are a lot of talented people in the world that are no longer being employed.You’re now having machines and robots build stuff, and now you have one guy doing that job, where you used to have five, 10, 15.
PAUL SOLMAN: And so companies can pay labor less, keep more for themselves and their mostly wealthy shareholders.Yes, half of us own stock, if you include our pension funds.But the top 10 percent own something like 90 percent of the stock market; the top 1 percent something like 40 percent of it.
At Zuccotti Park, home to the Occupy Wall Street movement and its “We are the 99 Percent” slogan two years ago, liberal economist Mike Konczal:
MIKE KONCZAL, Roosevelt Institute:We see things like offshoring and globalization have really pushed down labor wages relative to how much capital gains in the economy.So globalization is creating a lot of winners and losers, and a lot of the winners are people who own capital, like people who own the stock market, and the losers are people who work and are unemployed right now.
PAUL SOLMAN: And that even includes people who work at the market itself, says trader Mark Otto.
You have been here for how long?
MARK OTTO: Twenty years.
PAUL SOLMAN: And 20 years ago, what did this floor look like?
MARK OTTO: We have gone from approximately 5,400 at maximum capacity to down around 800, 900 right now.A lot of that has to do with the fact that I can now do actually — required nine people to do when I started out down here 20 years ago.
PAUL SOLMAN: And, says Mike Konczal, that’s why the recovery is slow, unemployment high.
MIKE KONCZAL: The stock market would actually be much higher if the unemployment was much lower.I think the economy is still really fundamentally weak, and that slack that’s in the economy right now, with all the unemployed people, all the unemployed businesses, would actually bring up the stock market even further.
PAUL SOLMAN: In the end, then, it comes full circle.The Fed is trying to lower unemployment by stimulating the economy.But, by doing so, in some minds, it is overstimulating the stock market in the process.