What Has Been Driving Stock Prices Up?
RENEE MONTAGNE, HOST:
And for the past few months, global stock markets appeared to be on an escalator going up, relentlessly reaching new highs. This week, that ride seems to be over - or maybe not. To find out, we turn, as we often do, to David Wessel, he's the economics editor of The Wall Street Journal.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: David, put the stock markets into perspective for us. Apart from the day-to-day ups and downs, which we have been seeing, how have the markets been doing?
WESSEL: Well, they've been doing pretty darn well. The U.S. stock market indexes are up about 15 percent so far this year, Germany's 10 percent, London 14 percent, France nine percent and Tokyo's Nikkei average 70 percent higher than it was a year ago. But this week was a reminder that stocks can go down as well as up. Japan lost 7.3 percent in one day on Thursday. And it had a wild ride on Friday and recovered just a little bit, and that gave the European and U.S. markets a little bit of the shudders.
MONTAGNE: Well David, it's not that shocking, in a way, because the world economy is not doing so well. But what has been driving the stocks up?
WESSEL: Well, you're right. The world economy is not doing all that well. So it is a bit of a puzzle, but I think a couple of factors are at work. One is that although unemployment is still high, wages aren't rising, growth is mediocre, profits are doing pretty well. And that helps boost stocks, of course. Second, there is a palpable sense of relief, that while we don't seem to be enjoying rapid growth, there's less and less chance of some economic calamity - another big bank failing or a break up of the European currency, and so there's a, kind of, sigh of relief. But finally, the Federal Reserve and other central banks have pushed interest rates very low. They've basically pushed people out of banks, out of bonds, into something else. And that something else, for a lot of people, is stocks. And that's giving stocks a real lift.
MONTAGNE: Of course, if stocks are, in part, because the Fed is putting a lot of money into the economy, then are stocks likely to go down when the Fed stops pouring cash into the economy?
WESSEL: Well, they might. And we had a really interesting test of that this week. The stock market gyrated as Ben Bernanke, the Fed chairman was testifying on Capitol Hill. First they moved up when he said I'm not ready to start pulling money out of the economy. Then they moved down in the question and answers when he said well, you know, in the next few meetings - which means sometime this year - we might stop putting so much money into the economy. And then they fell again in the afternoon when the Fed released some minutes of an earlier meeting when it turns out some people at the Fed are really ready, now, to start pulling money out of the market. So the stock market, both here and abroad, seems fixated on what the Fed is going to do, when is it going to do it, when it's going to remove some of this adrenalin from the economy. And so it sure looks like when the Fed pulls back, stocks will go down.
On the other hand, the Fed isn't going to pull back unless it thinks the economy is getting better, and if the economy's getting better, that should be good for the stock market
MONTAGNE: Well, then let me ask you something else, that I'm sure you can clarify. Whenever prices go up a lot - whether it's stocks, houses, bonds, or gold - someone shouts that it's a bubble and it's time to get out. Stocks have been rising a lot, have we just been saying do they have more to go or is this impressive run ending, do you think?
WESSEL: Well, frankly, I don't know. There are those who argue this can't last, that the market is being artificially propped up by the Fed and, recently, by the Japanese central bank. Europe's in recession, China's slowing, U.S. government is cutting spending. It's just a matter of time before the stock market catches up with reality and we get more bad days. But other people say, if you look at the ratio of stock prices to profits, it's not that high. I mean, if the economy gets better, more profits, stocks could keep going up. Goldman Sachs' chief equity strategist, a guy named David Kostin, is predicting that stocks will rise another five percent this year, and nine percent next year. So, who knows.
MONTAGNE: And, we'll just leave it at that then. Conversation for another day.
David Wessel is the economics editor of The Wall Street Journal. Nice to talk to you, as always.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.