Tuesday, April 13, 2010

Clueless economists

The Dow Jones industrial average on Monday closed above 11,000 for the first time since September 2008, when the financial crisis was just beginning. That's a bullish signal that reinforces the growing belief on Wall Street that the recovery in the economy and markets remains on track.

Even though the blue-chip index just got back to a level it first crossed in May 1999, analysts say topping the key psychological level could act as a "confidence booster," given that the Dow is up 68.1% from its March 2009 bear market low.

. . . "Clearly it is a vote of confidence in the economic outlook," says Ed Yardeni, president of Yardeni Research, an investment strategy firm.

. . . However, economists say a sharp rise in stock prices and the resulting rise in the value of stock portfolios and 401(k)s held by Main Street investors could create a feeling of financial well-being. This "wealth effect" could spur more economic activity.
"The market is going up, and it is lifting the psychology, the financial wealth and the confidence needed to engender better times on Main Street," says Bob Barbera, chief economist at ITG.

Higher stock prices might also spur a positive "feedback loop" and give employers the confidence to add workers, adds Jack Ablin, chief investment officer at Harris Private Bank.

Real unemployment (those unsuccessfully looking for jobs plus those who gave up trying) still exceeds 17%. Until that number drops significantly, there will be no "wealth effect". Don't listen to brokers and bankers with a vested interest in getting us to jump back into the stock market, spend and borrow.

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