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What Has Been Driving Stock Prices Up?


For the past few months, global stock markets appeared to be on an escalator going up, relentlessly reaching new heights. This week, that ride seems to be over - or maybe not.

To find out, we turn - as we often do - to David Wessel. He's the economics editor of The Wall Street Journal. Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Put the stock markets into perspective for us. Apart from the day-to-day ups and downs, how have the markets been doing?

WESSEL: Well, they've been doing pretty darn well. The U.S. stock market indices are up about 15 percent so far this year; Germany's 10 percent; London, 14 percent; France, 9 percent; and Tokyo's Nikkei average is 70 percent higher than it was a year ago. But this week was a reminder that stocks can go down as well as up. Japan lost 7.3 percent in one day, on Thursday. And it had a wild ride on Friday and recovered just a little bit, and that gave the European and U.S. markets a little bit of the shudders.

MONTAGNE: Well, David, it's not that shocking, in a way, because the world economy is not doing so well. But what has been driving the stocks up?

WESSEL: Well, you're right. The world economy is not doing all that well. So it is a bit of a puzzle, but I think a couple of - factors are at work. One is that although unemployment is still high, wages aren't rising, growth is mediocre; profits are doing pretty well. And that helps boost stocks, of course. Second, there is a palpable sense of relief; that while we don't seem to be enjoying rapid growth, there's less chance of an economic calamity - another big bank failing, or a break-up of the European currency. And so there's a - kind of sigh of relief. But finally, the Federal Reserve and other central banks have pushed interest rates very low. They've basically pushed people out of banks, out of bonds; into something else. And that something else, for a lot of people, is stocks. And that's giving stocks a real lift.

MONTAGNE: Of course, if stocks are, in part, because the Fed is putting a lot of money into the economy, then are stocks likely to go down when the Fed stops pouring cash into the economy?

WESSEL: Well, they might. And we had a really interesting test of that this week. The stock market gyrated as Ben Bernanke, the Fed chairman, was testifying on Capitol Hill. First they moved up, when he said, "I'm not ready to start pulling money out of the economy." Then they moved down in the question and answers, when he said, "well, you know, in the next few meetings" - which means sometime this year - "we might stop putting so much money into the economy." And then they fell again in the afternoon, when the Fed released some minutes of an earlier meeting, when it turns out that some people at the Fed are really ready, now, to start pulling money out of the market.

So the stock market, both here and abroad, seems fixated on what the Fed is going to do, when it's going to do it; when it's going to remove some of this adrenaline from the economy. And so it sure looks like when the Fed pulls back, stocks will go down. On the other hand, the Fed isn't going to pull back unless it thinks the economy is getting better; and if the economy's getting better, that should be good for the stock market



MONTAGNE: Well, then let me ask you something else, that I'm sure you can clarify. Whenever prices go up a lot - whether it's stocks, houses, bonds or gold - someone shouts that it's a bubble, and it's time to get out. Stocks have been rising a lot, as we've just been saying. Do they have more to go - or is this impressive run ending, do you think?

WESSEL: Well, frankly, I don't know. There are those who argue this can't last; that the market is being artificially propped up by the Fed and recently, by the Japanese Central Bank. Europe's in recession, China's slowing, U.S. government is cutting spending. It's just a matter of time before the stock market catches up with reality, and we get more bad days. But other people say, if you look at the ratio of stock prices to profits, it's not that high. I mean, if the economy gets better, more profits, stocks could keep going up. Goldman Sachs' chief equity strategist - a guy named David Kostin - is predicting that stocks will rise another 5 percent this year, and 9 percent next year. So, who knows.

MONTAGNE: And we'll just leave it at that, then; conversation for another day. David Wessel is the economics editor of The Wall Street Journal. Nice to talk to you, as always.

WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.

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