Economist John Kenneth Galbraith once observed that there are two kinds of market forecasters, those who don't know and those who don't know they don't know. That is well illustrated by the current disconnect between Wall Street and Main Street, as the market's leading indicator, the Dow Jones Industrial Average, continues to surge forward while the overall outlook for the U.S. economy appears mixed at best.
The Dow closed Tuesday at an all-time peak of 14,253.77, and many believe that the bullish trend will continue even if there is some profit-taking in the short term. Price-earnings ratios are not at levels more typical of market peaks quite yet, and the Dow still hasn't fully recovered from October 2007 levels when adjusted for inflation.
Naturally, conservatives have been quick to suggest that the robust Dow shows that sequester cuts are welcomed by Wall Street — or at least are not as threatening to the economy as President Barack Obama and the Democrats have suggested. But that would imply that the market is responding in some logical, thoughtful way to Washington's political establishment, or even to the economic reality as most of us experience it, and not the chaotic hurly-burly of global markets and unpredictable investment decision-making.
More likely is that nobody has any idea what the rising Dow means, nor can they, as Mr. Galbraith counseled, predict what's going to happen next. But the bull market does point to a resiliency in the economy and perhaps to some degree reflects strong corporate earnings (not to mention low borrowing costs, thanks to Federal Reserve monetary policy), fundamentals that should support further growth.
Whether that growth will benefit most Americans or just those at the top of the corporate heap remains to be seen. Many Americans will see the market upswing reflected in the monthly statements of their investment and retirement accounts, at least to the degree they have money in the stock market. Others are not so fortunate, but they, too, may yet benefit if rising stock values persuade more companies to expand and hire. Indeed, early indications suggest the private sector may have added nearly 200,000 new jobs in February.
Unfortunately, it will take a lot more than that to restore employment and consumer earning power to pre-recession levels. This recovery has featured no lack of corporate profits, but too little has trickled down to workers. Reducing the nation's 7.9 unemployment rate further ought to be a top priority for all — government, the private sector and the financial industry included — but it often doesn't feel that way.
The indiscriminate and abrupt budget cuts forced by the sequester certainly aren't designed to put people to work or ensure a broad and growing middle class. The across-the-board cuts at the Pentagon and a myriad of other agencies affected by the sequester may or may not produce the disastrous consequences President Obama and others forecast, but this much is clear: We can expect a lot more partisan squabbling before anybody gets serious about enacting policies that foster widespread prosperity.
The next big test is the continuing resolution, the stopgap measure needed to keep the federal government going past March 27 and for the remainder of the fiscal year. The good news, at least for the moment, is that the parties don't seem to be doing nearly as much line-in-the-sand drawing or chest-thumping. Both sides say they intend to avoid a government shutdown.
But that could change, as Republicans seem focused on restoring defense spending hampered by the sequester cuts and Democrats rally behind other programs, like early education and health care reform. There have been too many cliff-side standoffs over the last several months to feel particularly sanguine about a sudden spirit of cooperation now. Even Charlie Brown is apt to doubt Lucy's commitment to holding the football in place after so many disappointments.
Of course, that only makes the Dow's performance all the more remarkable. It would be nice to think those traders pushing stock values ever higher knew something that the rest of us didn't — that it's bound to work out for the U.S. economy just fine in the end. The more realistic view might be to remember how bullish the market looked in the fall of 1929 after its nine-year upward run, even as Congress debated the Smoot-Hawley Tariff Act.
The bottom line is that whether another record Dow closing is set today, tomorrow or next Tuesday, it could be a sign of improvement or just another bubble ready to burst. Perhaps it's merely the result of a lot of investors fed up with low bond yields. Whatever the cause, it's out of our control. Better to focus on what is within our power, at least theoretically — demanding our elected leaders bring a balanced and rational approach to growing the economy and reducing the budget deficit.