When The Stock Market Soars, Who Benefits Most?

The stock market had a strong 2017, and so far this year it has also been soaring, with the Dow Jones industrial average hitting the 25,000 mark last week.

Here & Now's Meghna Chakrabarti speaks with Diane Swonk (@DianeSwonk), chief economist at Grant Thornton, about which sectors are doing well, which are doing poorly and where the market might go in the coming months.

On which companies are leading the surge

"What we saw is a whole rotation. We saw a big surge in financial firms for a while, then we saw it move into technology, and now it's going back into firms that were the dogs of last year. And so you're seeing firms come back, like General Electric — I use that as an example because it's one firm that was really hit hard, and all of a sudden that and IBM started doing really well because people thought, 'Well listen, nobody has been buying them. so we might buy those.' I think what's really key about the markets is there's sort of a sense of euphoria that's reminiscent of the late 1990s. I've come to start saying we're 'partying like it's 1999,' quoting Prince, but we're in a 21st century economy. And, as you remember in 1999, that didn't end well. There are times when the market is not the U.S. economy, and it's not leading the U.S. economy — in fact, it gets ahead of the U.S. economy. And my concern is that's where we are today. I don't prefer a correction. I would prefer the market to move sideways and allow the economy to catch up. I fear that may take a while, but that would be my preference."

"It just worries me that people are so euphoric and there's a disconnect between the momentum in the stock market and the momentum the economy."

Diane Swonk

On who benefits from the strong performance

"It's not great news for every American. Only a little over 50 percent of Americans hold any kind of stock. That's way down from the peaks that we saw prior to the crisis that were almost two-thirds of Americans. It's very concentrated. But I think it's great the stock market's great. I think it's great. The U.S. economy is still expanding. Those are what we need — longevity. What you fear is overheating and getting ahead of yourself. Today there is a report out that we actually are seeing fewer people hedge their bets on the stock market, which means a kind of confidence — it's like driving without a seat belt. They are so confident the mark will keep going up, they're flying without a safety net. And I think this is also very concerning, is those investors investing in the stock market getting ahead of the underlying fundamentals. Things like waiters and my hairdresser telling me to buy bitcoin or telling me to buy Apple.

"It really is sort of stunning. And, again, overly euphoric, almost 'irrational exuberance,' which [economist Robert J.] Shiller, he actually quoted that phrase to [former Federal Reserve chairman Alan] Greenspan and uttered it before it became famous. And it is important to remember, because that was back in 1996 that phrase was first heard, and we saw the markets go up well above that for many years afterward. You can't time market volatility. It's a very difficult time to pick winners and losers. We know the oil industry has won dramatically from deregulation. It's won from lifting on drilling restraints. It's won on the tax cuts as well. So that's an industry that everyone's excited about. That said once oil production ramps back up in the U.S. and cuts aren't as great in places like Saudi Arabia, which still acts like a spigot on prices, all of a sudden your prices lower and the industry is doing worse six months down the road. So it's a very dynamic environment and I think that's something that people have not taken into account."

On proceeding with caution

"This exuberance we're seeing, it is a positive thing. You just don't want to get ahead of it. And that's — we haven't really lost our herd mentality. We've seen it many times. The good news is that the market gains we're seeing are not highly levered, like they were, say, in 1929. So when we worry about the Shiller index and Bob Shiller and his valuations, one of the things he cautions is while, if it crashes, it will be more like a bust from the tech bubble or a burst like in 1987. There wasn't as much leverage in both of those times so it didn't take the whole economy down, or it did into a minor recession, not a major recession. It'd be more paper losses, and those people who got the most from it would, also, maybe not be spending as much on yachts and things like that. So we don't worry about that all that much. But I do think, in a broader sense, that we do have to sort of be cautious. And it just worries me that people are so euphoric and there's a disconnect between the momentum in the stock market and the momentum the economy.

"Now to some extent, earnings will show up, because we just gave a big tax cut, but that's a one-time effect. What we're doing is we're sort of getting a sugar high today at the expense of growth later in the cycle because we're taking on a lot of debt to do it. And historically, debt-driven growth has ended poorly. And even though the stock market isn't leveraged, we are leveraged as a nation. So as good as these tax cuts look, today there's a trade-off over just a three- to four-year horizon where debt gets much higher and the cost of that debt and the cost of higher interest rates, particularly for lower-income and middle-income households, becomes more burdensome."