Investors Are Chastened. That’s A Good Thing.
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What a spectacular year was 2013.
Markets boomed. Stocks hit a record, with the Standard & Poor’s 500-stock index up almost 30 percent, the best performance in almost 16 years. Capital-raising is back, baby, with initial public offerings, like the one for Twitter, giving us that sweet 1990s feeling all over again. Investment banks had a great year.
In previous eras, all of this might have been enthusiastically celebrated. Street vendors would break out Dow 16,000 hats. The chief executive of Snapchat would be named Time magazine’s man of the year, children’s division. The media would serve up adulatory profiles of successful investors, glorious winners, implying they had achieved something close to heroic.
This time around, reaction is tempered. We are older and more jaded. It’s almost as if we are displaying wisdom.
Well, maybe that goes too far, but at a minimum, people know not to be too excited. Today, these successes are underscored with three vital observations: that the exuberance could just as easily disappear, leaving a crash in its wake; that strong capital markets don’t necessarily signify a strong economy; and that the gains are unequal.
Sadly, those hard lessons had to be won by living through two huge bubbles, stagnating wages and an economy suffering from chronic fatigue syndrome.
First, the most widely and easily grasped lesson. There is an innate skepticism about the stock market. Investors and the media voice a steady undercurrent of concern about high valuations. I did research on the news search service Factiva for mentions of the “Dow Jones industrial average” and “bubble,” comparing 2013 with the great bubble year of 1999. Last year, 1,832 articles shared both terms, while in 1999, there were only 1,342.
Perhaps we are not in a bubble today — it’s something that doesn’t have a clear definition, after all. Perhaps in many of those articles, bubbles are mentioned only to dismiss the notion that we are experiencing one. Perhaps investors in those articles are invoking the cliché that stocks have more room to rise because they can climb the proverbial wall of worry. (In investing circles, markets are due to rise if there is a sufficient number of worried people on the sidelines, holding their money back.) No matter. It’s a good sign that bubble-caution lines the intestines of investors and the media.
Bubble-consciousness means that investors, the media and the public may finally be mistrustful. Considering how treacherous the markets are, that mistrust is warranted.
In more financially naïve times, the stock market served as shorthand, a neat little number that told us whether the United States had a good day or poor one, depending on whether the market went up or down. That antiquated notion has been more or less retired. Now, when we see the markets doing well, we understand that it has little to tell us about the broader economy. Large publicly traded companies make up a small portion of the overall economy, and large portions of their profits come from overseas. The Dow Jones industrial average accounts for a relatively small sliver of employment and wages. Today, job growth remains weak, while the portion of employment-age workers is low. The stock market is not us.
So as companies’ profits zoom upward, we react more cautiously. Last year, corporate profit margins were about twice as high as where they have been on average since World War II, according to the economist Mark Zandi. Investors care about whether those margins are sustainable. Investors think about margins relative to the price of stocks.
But the public — especially the non-stock-investing portion — doesn’t. Today, the public cares more about the other side of the corporate equation: wages. Median income hasn’t gone up in more than a decade and is actually down from the late 1990s, when adjusted for inflation. Those rising profits reflect companies’ success in keeping labor costs low.
Investment banking fees rose 3 percent, to almost $80 billion globally, the best year since 2007, according to Thomson Reuters. I need not remind you that was the year before the crash. Bonuses for traders and bankers will provide plenty of rolling-on-a-pile-of-money time. The bonuses will be especially lucrative for those paid in deferred stock of their own banks, the current solution to linking pay to performance.
But again, we understand how to interpret that. High profits at financial firms mean that someone, somewhere has taken on added risk. And it also means that we have a simple number to use when assessing how seriously to take the constant whining from bankers about how governments are regulating them out of existence and threatening our capitalist way of life.
The wealth of billionaires soared. In a measure of 300 billionaires, Bloomberg News calculated that they added more than half a trillion dollars to their fortunes last year for an aggregate total of $3.7 trillion. Today, no longer is the 1 percent viewed through the prism of celebration and envy. Now, wealth is inextricably linked to income inequality. Half of the United States population is either poor or “near poor,” according to census statistics.
We haven’t solved the problems of depressed employment and wages, widening income inequality or inequitable economic growth. But at least we are beginning to define the issues correctly. The interesting test will be whether the lessons we seem to have learned will stick this time. Or will these niggling complications invading our prosperity be sloughed off as the markets continue to rise?
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