Tuesday, February 5, 2013

Stocks Are Up, Economy Is Down

Why is the stock market up when the economy is in a shambles?  It’s a question many Americans are asking.

On Friday, the Dow eclipsed 14,000 last week for the first time since October 2007, even as news hit that the U.S. economy grew at -0.1% last quarter. During his weekly radio address, President Barack Obama took a victory lap of sorts, saying: “Home prices are starting to climb again. Car sales are at a five-year high.  Manufacturing is roaring back.  Our businesses created 2.2 million jobs last year. And we just learned that our economy created more jobs over the last few months than economists originally thought.”

But as financial experts are quick to point out, the economy and the stock market are not the same thing.  
“Don’t be fooled into looking at the Dow as your economic barometer,” says the NY Post’s Jonathon M. Trugman. “That’s for the lazy, the amateurs, the armchair partisan economists.”
Indeed, most industry insiders don’t pay much attention to where the Dow closes. "It is good trivia to talk about on television and the radio," said Joe Gordon managing partner at Gordon Asset Management.  "It's meaningless to the average professional."
Still, why is the Dow above 14,000, who benefits, and will it last?
The resolution of the fiscal cliff, the relative temporary stabilization of the Eurozone, and the easing over concerns about Chinese economic growth curve has, for the moment, calmed the stock market. But experts say the Dow’s recent upward lift is largely the result of pumping by the Federal Reserve and may prove short-lived.
"The market environment is likely to get tougher in February and March as investors wrestle with the impact of fiscal tightening on the economy," said BlackRock's global chief investment strategist Russ Koesterich.
And of course, Dow 14,000 does nothing to ameliorate President Obama’s continual call to reduce income inequality. "Gains from the recent uptick in the stock market go almost entirely into the hands of the rich," said New York University Economics Professor Edward Wolff.
Yet whatever the stock market does, it still doesn’t change the stark reality that the so-called  economic recovery continues to flounder.
“We are in the most anemic recovery in modern history,” concedes former Clinton Labor Secretary Robert Reich. “The government is heading in exactly the wrong direction.”
Despite the White House’s best attempts to spin the abysmal GDP contraction and the unimpressive jobs numbers, the data show the economy is moving sideways, says President of the American Action Forum Douglas Holtz-Eakin. “Liberals are celebrating a revision of 35,000 jobs a month in 2012--proof that they are charter members of the flat-earth society.  When the economy is stalled, the new normal says 'break out the champagne.'”
Still, despite the broader economy’s instability and downward trajectory, should individual investor’s dip their toes in the Dow 14,000 waters? No, says chief market strategist at ING Investment Management Doug Cote.
"People are panicking that they missed the bull market and they're going to get in come hell or high water," said Cote. "But this is not a good time, the party is starting to be over.  I think this thing comes back to Earth a lot faster than it went up."

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