Why it’s OK to celebrate the latest economic wins

Written By BY SANDRA GUY Staff Reporter Posted: 08/05/2014, 06:46am
Array Fireworks frame representatives of Macy's as they ring the closing bell of the New York Stock Exchange, Thursday, July 3, 2014. The Dow Jones industrial average jumped above 17,000 for the first time Thursday after the government reported a surge in hiring last month that was much bigger than investors and economists were expecting. (AP Photo/Richard Drew)

The U.S. economy ended Thursday with multiple wins: the Dow Jones industrial average — the oldest barometer of the stock market — topped 17,000 for the first time in its 118-year history, job growth exceeded expectations, the major stock-market indexes reached new highs and even discouraged workers kept looking for jobs.

Is it time for a bubble?

Most experts say no, and they point to lots of reasons to celebrate what looks to be a strong year for the economy and the stock market.

So it’s OK to be bullish.

“The market thinks the Federal Reserve will not move quickly to raise interest rates, and that, combined with a stronger economy — as today’s employment report suggests — make for a bullish environment for stocks,” said Francisco Torralba, an economist at Chicago-based Morningstar.

Though stock valuations are high, Torralba expects returns over the next five to 10 years to be low because, historically, valuation measures and equity returns go in opposite directions.

Yet the Dow topping 17,000 for the first time on Thursday “is a huge milestone,” said Jeff Kravetz, regional investment director for the private client reserve of U.S. Bank, because it’s backed by strong fundamentals.

“We’ve got low inflation, low interest rates and a Federal Reserve that continues to keep interest rates low,” he said. “We’ve got great news from the labor markets with unemployment at 6.1 percent — that’s down from 10 percent at the peak (of the recession) in October 2009. And we’ve had job growth of more than 200,000 a month for five straight months. That hasn’t happened since the technology bubble in the late 1990s.”

Thankfully, no such bubble exists now, Kravetz said, because the five-year-long financial crisis just ended, prompting consumers and corporations to clean up their balance sheets and get rid of lots of debt. That’s virtually the opposite of the 1999-2000 tech bubble in which speculation blew up the valuations on companies that produced no revenues so high, they ultimately crashed.

Kravetz believes the stock market could end the year with 10- to 13-percent returns — a good year but short of last year’s 30 percent.

One of the biggest reasons to cheer Thursday was the jobs report, experts said.

“We got the trifecta today,” said Jim Russell, senior equity strategist at U.S. Bank, headquartered in Minneapolis.

Russell pointed to three positive points: The U.S. added 288,000 jobs in June in “a meaningful exceeding” of expectations for a jump of 215,000; job growth for April and May were revised upward — April nonfarm payrolls growing by 304,000 from 282,000 and May increasing by 224,000 rather than the previously reported 217,000 — and the number of long-term unemployed, those out of work for 27 weeks or more, kept looking for work for the third straight month.

Those numbers combined to show that the economy is starting to improve by itself, without government intervention, paving the way for the Federal Reserve to withdraw its economic stimulus policies, Russell said.

That’s good news to the markets, and they showed it. The Dow and S&P 500 ended at their third straight record highs, and the Nasdaq closed at its highest since 2000.

The Dow is now 14 percent higher than a year ago.

Of course, happy always attracts some dark clouds.

A Web search unveils a few analysts arguing that the stock market is a “dangerous speculative bubble” because of high stock valuations, low interest rates, record-low yields on long-term interest rates and investors getting too happy, among other indicators.

And international politics pose risks too.

“The tensions in Iraq are escalating and the issues in Ukraine haven’t been resolved,” Kravetz said. “For consumers here, the implications involve oil. If we were to get a big spike in oil and gasoline prices, that could affect consumer confidence. You might think twice about going out to dinner or to the mall if gas prices go up.”

Email: sguy@suntimes.com

Twitter: @sandraguy

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