Share prices of leading U.S. companies reached new highs last week. The Dow Jones Industrial Average of 30 blue-chip stocks closed above 14,000 for the first time since 2007. Our public authorities are complaining of hard economic times, but investors don't entirely agree with them. This merits close examination.
Investors in leading U.S. firms have no magical knowledge about the future. The last time the Dow reached this level was Oct. 8, 2007, hitting its all-time high of 14,165. Then the U.S. banking system collapsed, leading to a recession from which the industrial nations are only now emerging. Had investors known that was about to happen, they would not have been bidding stocks up to unheard of levels.
Nevertheless, the Dow is an important measure of something. The 30 companies that make up the index -- the likes of Coca-Cola, IBM and Merck -- do business around the world. They can sell where the prices are best, produce where the production is most efficient and go for opportunity wherever it arises. The people and institutions trading those stocks likewise live all over the world. The index therefore shows something about how American capitalism is doing and also about how the whole industrial world is doing. A rising Dow says they are doing just fine.
This news differs sharply from the prevailing public discourse about economic conditions. Bank of Canada Governor Mark Carney says global growth prospects have weakened since October. U.S. growth was restrained by de-leveraging and political party warfare, Europe was in recession and some emerging economies were slowing down. The Canadian economy probably grew 1.9 per cent in 2012 and might grow by 2.0 per cent in 2013 and 2.7 per cent in 2014. Prosperity is coming, in short, but this isn't it.
In Washington, the Federal Reserve said employment was not recovering the way it should. The Fed would, therefore, keep its interest rates at rock-bottom and continue buying mortgage-backed securities from banks in the hope of stimulating economic activity.
Both Finance Minister Jim Flaherty in Ottawa and Premier Greg Selinger in Manitoba have announced they cannot balance their budgets as they formerly intended. Mr. Flaherty said this was because of global economic conditions. Mr. Selinger blamed what he said was a fitful and uncertain global economic recovery. Both of them intend to balance their budgets, a few years later, when prosperity returns.
The market signal of the Dow, however, suggests that prosperity is what we are looking at right now. Not all companies and not all countries and not all families share equally in that prosperity at the same time, but when you add it all up in the way the stock market does, these are the good times. It's probably not going to get much better than this.
Markets have been wrong before and they may be wrong this time. It's possible the world is about to plunge into another recession, but the strong performance of the index reflects the good earnings reports of the firms that make up the index. The occasional jolts reflect shifts in party warfare in Washington and stimulative gestures by the Federal Reserve, but the long sustained rise that brought the index above 14,000 reflects the return of global prosperity.
If a Canadian federal or provincial government cannot balance its budget in these conditions, there is little reason to think they will ever do so. Prosperity is not a distant prospect that will turn things around a few years from now, the stock market is saying. This is it.