Peter Morici

The bull market just marked its fifth anniversary—middle-aged by historical standards but not dead yet.

Money managers have valid concerns, but those should be measured against changes in the national and global economies.

Since the financial crisis, the Federal Reserve has pumped $3 trillion into banks and bond markets, pushing down interest rates and making stocks attractive.

As the Fed winds down this policy, interest rates may not rise nearly as much as predicted, further sustaining stocks. For one thing, U.S. banks have consolidated, reducing competition for savers, and CD rates are not likely to return to pre-crisis level. And foreign investors fleeing turmoil abroad are seeking safe haven in U.S. bonds and real estate.

Individual investors took flight from stocks during the financial crisis, and continued pulling money out through 2012. Most folks can’t finance retirements on permanently lower CD and bond rates, and will move back into stocks, giving prices a further boost.

The average price of the Standard & Poor’s 500 stocks, which account for about four-fifths of publically traded companies, is about 16 times last year’s earnings—that’s a bit frothy. And corporate profits have been juiced by cost cutting and wider profit margins, as opposed to strong revenue growth in a slowly expanding U.S. economy. It’s hard to see how profits on domestic sales can be pushed up a lot with nominal GDP growing at 5 percent a year.

However, U.S. companies earn about half their profits abroad, and while Asian growth is slowing, Europe is on the rebound. Overall, global growth should pick up in 2014.

In emerging markets, which still account for the lion’s share of global growth, profits share of net sales are larger, and engaged U.S. companies should be able to sustain, and even expand profit margins. Those will support a higher price earnings ratio.

Investors focus too much on the recent bubble and financial crisis. Problems in housing and lending practices have been fixed, but stock prices have not kept up with the economy since the turn of the century.

Since 2000, the S&P 500 has gained only about 23 percent, not much considering inflation, nominal GDP and corporate profits are up 43, 70 and 440 percent, respectively.

If you are saving for a down payment for a house, buy as soon as you can. A home priced within your means remains your best, first investment—it pays dividends every night you sleep in it.


Peter Morici

Professor Peter Morici is a recognized expert on economic policy and international economics. He has lectured and offered executive programs at more than 100 institutions including Columbia University, the Harvard Business School and Oxford University.
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