I know everyone wants to find something to celebrate these days, but record stock market highs really should not be on the list. While the Dow has passed its 2000 bubble peaks, as everyone should be aware, it's still well below its 2000 level after adjusting for inflation. That is the only serious basis for a comparison. Furthermore, the Dow index is comprised of 30 large companies, the S&P 500 index is far more representative of the larger stock market, consisting of companies that account for close to half of the market's capitalization. The S&P 500 is still almost 10 percent below its 2000 peak in nominal terms. It is down more than 25 percent after adjusting for inflation. The more important part of the story is that the stock market is supposed to represent the discounted value of future profits. If profits are expected to be higher because there is widespread optimism about more rapid growth, then this is genuinely good news, but if expected profits rise simply because investors anticipate further redistribution from wages to profits, then the vast majority of the public has little to celebrate. Even in the era of 401(k)s, three quarters of the public holds less than $25,000 of stock (including mutual funds in retirement accounts). So most people have little reaason to celebrate a redistributin from wages to profits. Since I have not heard many (any?) forecasters upping their growth projections, I assume that the stock rally is based on expectations of further redistribution, that is insofar as it has any basis in fundamentals at all.
-Dean Baker
