Bull Market Blues
there are three big points of slippage between stock prices and the success of the economy in general. First, stock prices reflect profits, not overall incomes. Second, they also reflect the availability of other investment opportunities — or the lack thereof. Finally, the relationship between stock prices and real investment that expands the economy’s capacity has gotten very tenuous.
On the first point: We measure the economy’s success by the extent to which it generates rising incomes for the population. But stocks don’t reflect incomes in general; they only reflect the part of income that shows up as profits.
.. On the second point: When investors buy stocks, they’re buying a share of future profits. What that’s worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor, with interest rates on long-term government bonds not only very low by historical standards but zero or negative once you adjust for inflation.
.. how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power — brand position, the advantages of an established network, or good old-fashioned monopoly.
.. while record stock prices do put the lie to claims that the Obama administration has been anti-business, they’re not evidence of a healthy economy.