Robert Samuelson in the Washington Post Gets It Right on the Stock Market and the Economy

Are You Listening Wall Street?

Writing on economics in the Washington Post, Robert Samuelson (no relation to Paul) has a column that should be read by every single investor, and certainly by every single right wing capitalist that thinks basic economic policy that aspires to generate growth by increasing the income of the middle class is somehow a socialist/commie plot.

Mr. Samuelson documents the rise of the stock market during the tepid economic recovery,

At the end of November, reported Wilshire Associates, stocks were up nearly 30 percent for the year, representing a gain of about $4.8 trillion. From the market’s recent low in March 9, 2009, when the economy was in a tailspin, the increase has been 180 percent, or nearly $15 trillion. If you dislike this comparison, then measure the gain since the market’s pre-recession high on Oct. 9, 2007. The increase is 21.5 percent, or $4.2 trillion.

And he correctly diagnoses the driving force behind stock price increase, the huge growth in corporate profits.

Finally, growing profits explain much of the market’s increase. In theory, stock prices reflect present and future profits, and — despite a sluggish economy — corporate profits have increased impressively. By government figures, they’re up 39 percent from their 2006 pre-recession peak. Profit margins are near record levels, about 9.6 percent of corporate revenues, noted S&P’s Howard Silverblatt. Higher profits have kept a key stock market indicator — the price-earnings ratio — well within historical norms, found a study by theMcKinsey Global Institute, the consulting company’s research arm.

But his real contribution is this.

What’s clearer is that stocks and the “real economy” of jobs and production have become disconnected — and that this cannot continue indefinitely. There are practical limits to how much companies can improve profits without stronger economic growth and higher sales. If these don’t materialize, we may discover that the market is not a bubble but a blob that goes nowhere quickly.

That’s right, unless the economy grows the long term growth of the stock market will stop.  And unless growth is restored to low and middle income Americans, whose consumption drives investment and economic growth, the economy will not grow.  And unless policies are developed and implemented that stimulate the growth in income for those groups the very investors who think they can win by making low and middle income families losers will themselves be losers.  In short, policy to continue to skew the distribution of income towards the wealthy will be a lose-lose proposition.