The Dow Jones industrial average briefly flirted with 13,000 today, marking the first time since May 2008 that the august index has reached that level. The number is purely symbolic, of course, but the steady rise of stocks this year (with the major indices up anywhere from 5 to 10 percent) has taken many by surprise, none more than Wall Street professionals who have assumed a Greek default and the ensuing financial catastrophe to be a near certainty. Instead of a Europe-led meltdown, we are witnessing a melt-up.
The last time the markets were at their current levels—the tech-heavy NASDAQ index is also at its highest since the Internet bubble burst in 2001—sentiment was radically different. In May of 2008, Bear Stearns had nearly collapsed, only to be bought on the cheap by J.P. Morgan, and the bankruptcy of Lehman Brothers was a nightmare scenario that had barely been contemplated. The housing bubble in the U.S. was clearly deflating, but unemployment had not yet spiked. And while many believed a recession was looming, few forecast a financial crisis. Still, the outlook was cloudy at best, and a descent from 13,000 seemed likely.
Today, four years later, the mood is far more tentative—yet the outlook is considerably brighter. Or rather, the outlook for stocks is brighter. For two years, markets have been buffeted by Aegean waves, with concern that Greece and its debts would upend the entire euro-zone economy and plunge the global financial system into disarray. This weekend, after months of delay and brinksmanship, the financial ministers of the euro zone agreed to the next tranche of bailout money for Greece, which will include write-downs of Greek debt by as much as 70 percent. Add to this the aggressive, unorthodox actions of the European Central Bank to provide enough liquidity to stressed European banks and you have a recipe for the resolution to the European crisis that has roiled markets.
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This is hardly a consensus view. If you look at how professional money managers are behaving, they are alternately worried that they are missing a rally and convinced that whatever strength there has been will soon reverse in a fog of Greek default, European recession, Chinese weakness, rising oil prices, and U.S. mediocrity. Hedge funds have lagged the market, and trading volumes have been light—all signs that more people are still waiting and still uncertain.
The strength in financial markets, and stocks especially, is not a proxy for real-world economies. It’s been said before and needs to be said again: Wall Street isn’t Main Street. The Dow can be 13,000 or 14,000 and it won’t matter a whit to the millions of unemployed and underemployed. Few jobs are created by rising equity prices, and companies will not hire unless there is stronger demand, no matter how high their shares climb. They will sooner pay a dividend to shareholders, buy back stock, or acquire competitors than hire extra bodies that are not necessary for managing current business or creating new ventures.
That said, the strength of stocks does say something about the global world of companies and capital. There is strong demand globally for goods and services, demand coming mostly from the powerful emerging economies such as China, Brazil, Indonesia, and Turkey. That strength is offset by an anemic Europe and matched by a United States that is certainly stronger than most Americans believe, even though the benefits of that strength are very unevenly distributed. The reason that so many companies are thriving as never before—and why their stock prices are starting to rise—is that the world as a whole is in the midst of the most robust period of wealth creation that the human race has ever known. But it is happening to the formerly poor of China and India and Brazil—and not to the still-rich Americans and Europeans. The latter are stagnating or barely growing; the former are bursting at the seams, and thousands of companies are at the epicenter of those trends.
Finally, the current strength in stocks needs to be put in the context of more than a decade of truly middling results. No matter how much equities go up now, they are still making up for lost ground from years of either negative or flat growth. And the negativity in finance-land only compounds the issues. Having been blindsided by the financial crisis of 2008, traders are obsessed with the next black swan, convinced that catastrophe looms. There is such a thing as irrational exuberance; this market is not that.
Judging by the retreat of individual investors and retirees who have seen investment accounts dwindle, stock markets are treated with skepticism and distrust, the casinos of the rich and foolish. Those attitudes also prevailed in the 1940s, 1950s, and into the 1960s after a generation had been eviscerated by the crash of 1929. Until those attitudes shift, far more people will view financial markets as a combination of alchemy and corruption rather than as an opportune place to invest.
For now, the recovery in stocks has been too gradual and is still too tentative to change those views. And professional managers are still too uncertain. But the recent strength, taking place against that uncertainty, has reflected realities that have been almost completely obscured of late: that the global system is more stable than people in the Western world believe; that, on balance, more wealth is being created worldwide than being destroyed; and that companies are thriving because they are meeting real demands of real people across the world.
There always have been and there always will be headline risks and possible crises: maybe there will be another wave of euro fear; maybe Israel will attack Iran; maybe something will happen somewhere. The unknown has always been part of the mix, and it’s a fair bet that it always will be. The crises that have obsessed markets for the past years—debt and defaults, housing markets, Europe and Greece—are winding down. And markets are gearing up. Maybe it’s time to focus on that.
