Friday, May 05, 2006

The Stock Market! And 2006 and 2008.

As a guy with a 401k that's devoted 100% to equities (about 80% US, 20% foreign, if you care) I've been pretty happy, of late, to watch my balances rising along with the Dow, the S&P 500 and the MSCI EAFE indexes. Stocks are up! Yay!

But, putting my own retirement accounts aside and getting political again (because this is, after all, a political blog)... there's really no cause for euophoria, at least when we're judging how the stock market is reacting to the current US government.

The Dow is, as I write this, at about 11,500. It'll likely fall a bit Monday as traders take profits, but we're comfortable over 11,000 and corporate profits and prices compared to those profits (along with other fundamental valuations) do seem to support a continued rise in the broad markets. I wrote at my employer's Web site, at the start of 2006, that the Dow would hit 12,000 by the end. I stand by that. I happen to think, despite obvious negative evidence like, say, oil and energy prices, that the market will give a decent return this year.

So, what does this say about Bush and his handling of the economy?

It says that it took Bush 6 years to get the broad markets (excluding the Nasdaq, which has still not regained its losses) just to get the Dow and S&P back to the levels that they were at when Clinton loeft office. In other words, were you a right wing partisan investor who stayed out of the market under Clinton and then bought shares the moment Bush sqeaked and clawed by Gore... you'd have just now, after six years and a second election (where Bush barely squeaked by Kerry) have found yourself a bit better than even. You'd have been farther ahead had you put your cash in a money market fund. Since inflation has gone up under Bush (not by a lot, but still up) it's fair to say that your stock returns under Bush have been no better than putting your money in your closet (supposing, of course, that your closet wasn't destroyed by a hurricane that your government couldn't seem to plan for).

In short, Bush has presided over (I say presided over, not "given us," since responsibility is hard to assign here) a short but deep recession and a recovery that took five years just to regain the paper losses that the recession caused. Worse than that, the recovery has been a rough one, driven largely by outsourcing and by (though our unemployment statistics are, and have been, low) a fear of unemployment that has kept wages for workers low. The recovery's been driven by capital gains and dividends (which were given preferential tax treatment) and not by hard work (which has been rewarded with wages that have barely kept up with inflation). It's been, in short, a recovery that can be measured mathematically, but that has left a whole lot of Americans feeling like they're still living in the throes of recession.

The market's up. In a lot of ways, that's good. I have money in stocks. I've watched those balances climb. On a personal level, my wages have outpaced inflation. But that's only because I've been lucky enough to get some promotions. Absent those promotions, I'd have fallen behind. Indeed, at a few points over the last six years, in the times in between those promotions, I really did fall behind, and I felt the pinch. I'm no complaining. Too many better people have had it worse and I'd never insult them by whining. But, it is a fact that, for me anyway, ONLY promotions that were granted at the discretion of people who might well have decided to hold off, have kept my basic wage growth ahead of inflation.

So... the market's up. That's good. I benefit. Many of you benefit as well. If you're in the market, you're getting something. But the economy as a whole? Again, I have to stress... the market's up, but it's only up to the levels that it reached under the Clinton Administration and it took the market nearly six years to get there. Also, when I say, "the market," I mean only the S&P 500 and the Dow. The Nasdaq hasn't come close to regaining its losses. Finally... Wall Street's measure of our economy just doesn't reflect or illuminate the struggles of people's day to day lives. Today, for example, the government released a job's report that told us that job creation was only about 2/3rds of what economists expected. You stock investors out there will know that a company that misses earnings estimates by even a penny can be punished to an absured degree. But when the government admitted that it's policies had created just 2/3rds of the jobs they led people to expect... the Dow went UP 140 points. That's because our government's failure convinced investors that the Federal Reserve will not continue to raise interest rates in order to slow down the economy. A company that misses earnings will pretty much never be told by investors that the company's shortfall simply represent reasonable, rather than uncontrollable growth. But, when it comes to our government, that's how things work.

Not only are we just now tenuously grasping at the stock market valuations that we had achieved six years ago, but the stock market is actually signalling to the country and telling us all that slower, more moderate growth is good. From one point of view, the stock market is right. From the point of view of somebody struggling in this economy, somebody working hard but somehow falling behind rather than getting ahead, it's an insult.

I think that in 2006 and in 2008, Republicans will crow about stock market returns. I happen to think, for reasons aside from politics, that Republicans will have the numbers behind them when they crow. Corporate earnings are, indeed, up. They're also, based on projections, heading up. When you buy a share of stock, you're buying a share of earnings. So, share prices should continue to climb.

But that doesn't mean that the economy is well managed. When you judge returns on stock investments, you can pick any start point you want. If you bought the broad market on Jan 2, 2006, or Jan 2, 2003, or Jan 2, 2002, and held it until now... you made money. If you bought it on Jan 2, 1999 or Jan 2, 2000... you're probably about even and wondering what all the fuss was about.

Beyond that, however... if you're just working for a living, and working hard... you're likely falling behind. So, by the stock market measure, we're just now back where we started. By a lot of other measures, we're way behind. In 2006 and 2008, don't let the Republicans use raw numbers in order to win elections. Because, by even the measure most favorable to them... they've done pretty much nothing. By ever other measure... they've done harm.


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