The stock market bulls are on the run and the bears have been treed.
So far this year, you can’t help but smile a little when you open your 401(k) statement and look at the upward trajectories in your portfolio.
The bulls have been feeding on a host of good economic news and are licking their chops for more.
Still, given the last five lousy years, many of us are watching the battered bears up in those trees, wondering whether they’re going to climb down soon and eat the market rally for lunch.
The rally in all the various markets has been driven by stellar corporate profits. Top-line revenue has been hard to increase, but bottom-line profits have been supercharged by technology, efficiencies and job-cutting.
The markets’ overall stock price-to-earnings ratios are about at their historical norms, an indication that stocks are not yet overvalued.
But many fear that company profits have been propped up by the Fed’s easy money. And that the Fed has inflated a stock market bubble, with low interest rates driving investors into equities for better returns.
The rally’s all going to come to an end soon, the bears growl, as the Fed begins to tighten, probably later this year.
Never mind that a Fed tightening would show that the Fed thinks the economy is on sounder footing. Or that the upward move in interest rates last week — yields on the 10-year Treasury bills topped 2.1 percent, up a half percentage point — shows bond investors expect an improving economy.
The bears warn that the corporate surge in profits is bound to end no matter what.
Well, of course, maybe. Rising interest rates and/or slowing profits have usually stoppered the markets in the past.
However, let’s take into account three crucial trends highlighted by James Surowiecki, the economics columnist for The New Yorker. Today may be different from the past.
First, corporate tax burdens lightened — a lot.
“In 1951,” Surowiecki wrote in the May 27 New Yorker, “corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than 30 percent. Today, they pay only around 20 percent.”
Though the official U.S. corporate tax rate is 35 percent, most companies knock that down with deductions, credits or other maneuvers approved by Congress.
Absent overall tax reform, corporate America’s tax burden doesn’t figure to get heavier any time soon.
Second, many “American” companies are now multinationals. A bigger and bigger share of their profits comes from doing business in other countries.
In 1990, Surowiecki notes, “foreign earnings accounted for just a small fraction of corporate profits in the U.S. Today, they account for almost a third of corporate earnings, and they’ve nearly tripled since 2000.”
A U.S. economic slowdown won’t sap profits as much as in the past.
Finally, there’s the staggering decline in unions, along with the decline in wage demands from union and non-union workers, alike. Unless the economy picks up a lot of speed, the lack of wage bargaining power also looks to continue.
The U.S. economy, Surowiecki writes, has become “far more congenial to businesses and investors.”
But, as you might have already concluded, not so congenial to employees.
And that’s another huge break from the past, Suroweicki notes. Good corporate profits — especially when built on expense cuts and technological efficiencies, no longer bring jobs and rising wages with them.
Surowiecki hopes many Americans might be able to recoup in the stock market some of what they’re losing as workers.
But many Americans aren’t even in the market or have just a small amount invested. Many are still afraid of the market because of the 2008 financial collapse.
In the current market rally, Surowiecki says, many “have been on the outside looking in.”
If more do join in, he concludes, that will be another driver of a long-term market rally.
The bears are going to have to stay in their trees.