A RECORD DOW / THE WALL STREET JOURNAL REVIEW & OUTLOOK

REVIEW & OUTLOOK

March 5, 2013, 8:27 p.m. ET

A Record Dow

The sequester doesn't seem to worry the stock market.

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One thing for sure, the stock market doesn't mind the federal budget sequester. The Dow Jones Industrial Average climbed to a new nominal record on Tuesday, rising by nearly 1% to hit 14253.77 and finishing for the day above its previous closing high in the faraway land of October 2007.

If investors are signaling future economic prospects, then they aren't worried about the $43 billion in spending cuts in a $3.8 trillion fiscal 2013 budget that runs through September 30. President Obama and the Keynesians he relies on for economic guidance have been raising alarms that any decline in federal spending will hurt growth. They plug federal spending into their economic models and, presto, predict that the sequester will reduce growth by 0.6% this year.

 

These are the same economists who predicted that the $160 billion stimulus in 2008 would prevent a recession, and that the $830 billion stimulus in 2009 would have cut the jobless rate to 5.5% by now. It's still 7.9%. The miracle is that anyone still listens to this crowd six years after their ideas took charge of U.S. economic policy. ( George W. Bush was along for the fiscal ride in his last two years.)


The money for federal spending has to come from somewhere, which means it is borrowed or taxed out of the private economy. Federal spending increases growth and national wealth only if its uses are more productive than how the money would be deployed by businesses or individuals.


These sequester cuts are so small as to be irrelevant to the economy, except to the extent that they signal to Americans that Washington can at least cut some spending. That Republicans are letting the cuts take place without surrendering to Mr. Obama's demand for another antigrowth tax increase also helps investor confidence.


As for the new Dow record, the event is cause for cheer if not three cheers. Certainly it shows the resilience of the U.S. economy, which has climbed out of the depths of the 2008-2009 panic.


Those who bought at the bottom and showed confidence in a comeback have been amply rewarded. In the long run, investing in American equities and thus the U.S. economy has always paid.
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Associated Press

On the other hand, the Dow would need to rise another 8% or so to reach its previous high in inflation-adjusted terms. Daily market volume is well under what it was at the last peak. The average stock price-earnings ratio is about 14, or 20% cheaper than in 2007. This suggests either that there's still plenty of room left for a bull market to run, or that prospects for future earnings growth are more modest than they used to be. Maybe both are true.


The economy barely grew at all in the fourth quarter of 2012, though the growth signals in the first quarter have been better. Consumer spending has been muted, no doubt in part from the huge tax increase that arrived in January. But housing has been buoyant and much of the rest of the world outside Europe is growing.


The market's great wild card is the Federal Reserve's monetary easing. The Fed's explicit goal has been to lift asset prices as a way to create a "wealth effect," which is supposed to boost consumer and business confidence. Much of this money creation is going into stock prices, since at near-zero interest rates bonds yield little and bank savings or money-market accounts almost nothing at all. Money managers have concluded they must be in stocks or be left behind.


The Fed's bet is that the wealth effect will trigger a virtuous cycle of confidence, investment and faster future growth. We hope that's right, because if not this market peak will be as fleeting as the last. Meantime, Congress can stop worrying that it is cutting too much spending. By all means, cut some more.