Despite Economic Jitters, Stock Market Climbs

unemployment is still above 8 percent and some companies are warning of lower profits. Yet the stock market keeps climbing. Renee Montagne talks to David Wessel, economics editor of The Wall Street Journal, about why markets are at their highest levels since the financial crisis four years ago.

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STEVE INSKEEP, HOST:

It's MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, HOST:

And I'm Renee Montagne.

We can't report this morning of a big change in the economy. Unemployment is still above eight percent. Some companies are warning about lower profits. Yet, in spite of jitters about the sluggish economy, the stock market keeps climbing. The Dow Jones Industrial average is up 11 percent so far this year, the NASDAQ, 22 percent. In fact, overall, the markets are at their highest level since the financial crisis hit four years ago.

To talk about why stocks are doing so well, we've got David Wessel on the line. He is economics editor at the Wall Street Journal and he's a regular guest on our program.

Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: Well, let's start with some other bad news. Besides unemployment in the U.S., there's persistent problems in Europe. There's big emerging markets like China and Brazil that are slowing. So, David, why are stocks rising?

WESSEL: Well, it's always hard to know why the stock market does what it does. And it's important to remember that the mood on Wall Street could change abruptly at any moment. But one big factor is the Federal Reserve. It has cut the short term interest rates it controls nearly to zero. And it says it'll keep them there until 2015. And it's also printing money to fund another round of purchases of bonds, which has the effect of pushing down longer term interest rates, like the ones on mortgages.

Now, investors with a lot of money don't want to settle for less than two percent of their money, which is what you get if you buy a 10 year treasury bond. So they're looking for somewhere else to put their money where they can do better. And the stock market is one such place. I mean, every time the Fed makes a big move, the stock market goes up.

In effect, the Fed is chasing investors out of these safe investments, like U.S. treasuries or government guaranteed mortgage bonds, into riskier investments like stocks. And the Fed thinks that'll help the economy grow faster. And one reason is that over the - since the beginning of the year, the market value of all U.S. stocks, the whole thing, has risen about two trillion dollars. And so, stock holding households are richer. And richer people tend to spend more.

MONTAGNE: OK. But break that down a little bit more. If the Fed says it's taking these big steps because it's worried about economy, does that mean that the stock market is disconnecting from the health of the overall economy?

WESSEL: It does sometimes seem that way to me. I mean, at some point the stock market is going to meet the economy, which means either the stock market's going to go down or the economy's going to go up. You have to be careful about looking at the stock market as a predictor of the economy, of course. My Wall street Journal colleagues tell me that the volume of trading, the number of shares changing hands, has been low, which is another reason to watch this with caution.

But it's possible that the stock market is telling us something here - that the economy may be about to take a turn for the better. I mean, I was surprised to see in the last Wall Street Journal/NBC News poll that there's a surprising uptick in consumer optimism about the economy. But there are some wild cards here in the recent strength of the stock market.

MONTAGNE: And those are?

WESSEL: Well, the big one is Apple computer. Apple is so big that it's boosting some of the stock market averages. Not the Dow Jones, but the S&P 500 and the NASDAQ index. And it counts for 5 percent of the S&P, 13 percent of the NASDAQ. Apple is trading nearly $700 a share. That's about 70 percent higher than it was a year ago. All those iPhones and iPads add up and it's pushing up the stock market. Just Apple alone is pushing up the stock market.

MONTAGNE: David, just briefly if you can, how is the stock market being affected by the presidential campaign? I mean, do the prospects of one candidate or the other actually affect the market?

WESSEL: Well, they must affect it somehow. It's kind of hard to tell. You have the polls saying that Barack Obama's doing better. He's supposed to be the nemesis of big business. He wants to tax the investor class. Yet, as his fortunes rise, so do the stock market. Maybe there's a link there, maybe there isn't. I think the thing to watch is as the markets begin to focus on the fiscal cliff, the tax increases and spending cuts at the end of the year, we may see that they're not quite so happy with Washington as they've been lately.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor at the Wall Street Journal.

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