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News Opinion Editorial

The year of the bull [Editorial]

By most statistical measures, 2013 will be remembered as a respectable but not great year for the U.S. economic recovery. The gross domestic product grew by about 2.5 percent, which was slightly better than the nation has seen since the end of the Great Recession, and the number of jobs grew by about 200,000 a month.

But you wouldn't know that on Wall Street, which just wrapped up a year that was anything but average. By any standard, it was a monster year for stocks, one of the best of all time and a surprise to all the investment doomsayers.

How good was it? The Standard & Poor's 500 stock index was up 29.6 percent. The Dow Jones Industrial Average wasn't far behind, and one of the best performances was turned in by the Russell 2000 Index, the benchmark for small-cap equities, which was up by more than 31 percent.

In other words, an investor smart enough to put $10,000 in some plain vanilla index fund at the start of 2013 likely had about $13,000 by the year's close, and that's not counting dividends (or subtracting brokerage or mutual fund fees). That made it the best year on Wall Street since 1995, and it would take more than some short-term declines in stock prices as investors convert theoretical profits to the folding-money kind or even the inevitable downward market correction (the bursting of the proverbial bubble) to take the bloom of this particular rose.

While that's good news for all Americans, even those small investors who own stocks only through modest holdings in their 401(K) accounts or indirectly through pension funds, the triumphant year of the bull underscores the disconnect between Wall Street and Main Street. The top 10 percent of U.S. earners own about 80 percent of stocks, including the top 1 percent who control about 40 percent of equities.

That calls for a serious reexamination of U.S. economic policies, including the Federal Reserve's bond-buying program that has pumped hundreds of billions of dollars into the market. Assuming she is confirmed as the next Fed chair, Janet Yellen may want to accelerate the "taper" that has reduced the buy-back program to $75 billion this month.

Such purchases, along with near-zero interest rates, were meant to spur economic growth and jobs, not merely juice stock prices and Wall Street bonuses. After-tax corporate profits are at an all-time high as well, according to U.S. Commerce Department statistics, but that doesn't seem to have translated directly to the job market where the unemployment rate remains at 7 percent, a five-year low but still well above the target of around 5 percent.

Part of the problem may be that large investors can see the favorable economic circumstances that others can't. Consumer confidence is up to levels not found since 2008, but CEO confidence — the economic outlook from the proverbial corner office — was down significantly in the third quarter and likely tied to the uncertainty in Washington.

When the federal government is unable to set basic policies (or at least stick with them), approve a budget or even resolve to pay its bills by raising the debt limit, the nation's private sector leaders get worried. Washington can't run the economy, but it can certainly put a drag on it — and the inability of Congress to even keep government up and running full-time in 2013 does not exactly inspire confidence.

Meanwhile, the growing gap between rich and poor is only going to breed further discontent. When top-earners on Wall Street are busy shopping for exotic sports cars and second homes while unemployment and food stamp benefits are allowed to expire for the bottom tier, resentments are bound to fester no matter how hard the pitch for trickle-down economics.

It's highly unlikely that 2014 will be nearly as big a year for stocks, but it could be a good year for job growth if Congress will take action — invest more in badly-needed transportation and other infrastructure projects, approve immigration reform and tackle tax and entitlement reform. That large corporations and investors are currently rolling in profits should make some of these challenges a bit easier to swallow.

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Copyright © 2014, The Baltimore Sun
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