Stock prices are at two-year highs and the U.S. job market is showing its strongest signs of life since spring.
Yet many Americans may find it hard to feel elated about the sudden generous bump in their 401(k) accounts this fall.
Making good money in stocks with another assist from Washington
Even as the economy has brightened, Wall Street's latest burst of optimism has been driven in large part by bets on what will happen — or won't happen — in Washington. To that extent, going with the markets' giddy flow requires holding your nose. And that may not change soon.
First case in point: The Federal Reserve this week decided to spend $600 billion over the next eight months to buy Treasury bonds, with the goal of keeping longer-term interest rates low to spur the economy.
Where does the Fed get the $600 billion? From the ether. The central bank creates money with the push of a computer button or two.
While world financial markets soared Thursday on the prospect of the Fed's fresh wad of cash circulating around the globe, some of America's biggest trading partners and creditors expressed alarm at the Fed's latest largess.
Germany, China, Brazil and other countries worry that the U.S. is creating a new money bubble that will have ruinous inflation implications — for example, by feeding what is already a red-hot market in many commodities, from soybeans to gold to cotton, and by inflating the value of foreign currencies at the dollar's expense.
China, which knows a thing or two about manipulating an economy, expressed alarm via comments by Vice Foreign Minister Cui Tiankai on Friday. "Many countries are worried about the impact of the [Fed] policy on their economies," he told reporters in Beijing.
Meanwhile, a second force driving U.S. share prices higher this week was investors' relief over the huge Republican victory in Tuesday's elections.
Corporate America obviously wanted any anti-business tendencies of the Obama administration neutralized, and that's what voters delivered in handing the GOP a big majority in the U.S. House.
Wall Street, it's often said, loves nothing better than to see Washington gridlocked and unable to meddle with private enterprise. But even as fears mount that the Fed might be overdoing its support for the economy, there is a risk that a stalemate between Congress and the White House could paralyze Washington on crucial issues — say, the 2001 and 2003 income tax cuts scheduled to expire Jan. 1.
"The idea that gridlock is good for the markets is based on the notion that it prevents bad legislation from becoming law," said Steven Ricchiuto, chief economist at Mizuho Securities USA in New York. "But when legislation is necessary to help get the economy moving, political paralysis can be a decided negative."
Still, the biggest potential positive from the election, and from the Fed's new commitment to throw massive sums at the economy, is that businesses that know they could use a few more employees may finally get off the dime.
For much of this year, an oft-heard excuse from major companies that have been reluctant to hire was that the Obama administration's policies fostered gross uncertainty about the economy and were inherently unfriendly to businesses.
With the GOP's big win, however, good luck to the White House in getting anything even remotely anti-business through Congress.
So the Republican victory "removes the political head wind excuse" that companies have offered for not hiring, said David Kelly, chief strategist at JPMorgan Funds in New York.
Maybe, just maybe, a big turn in hiring began in October, as confidence rose about a Democratic rout in the elections. On Friday the government said the economy created a net 151,000 jobs last month, the first increase since May. Private-sector payrolls rose by 159,000 positions, the most since April.
Despite the better-than-expected report, the stock market's ascent slowed after key indexes rocketed Thursday to their highest levels since before the financial-system crash began in September 2008.
The Dow Jones industrial average edged up 9.24 points to 11,444.08 on Friday. For the week the Dow jumped 2.9%, and it's now up 9.7% year to date — 12.2% counting dividends paid.
The rally in U.S. and foreign shares since August has been so powerful that double-digit gains year to date now are the rule rather than the exception. Through Thursday the average domestic stock mutual fund was up 12.3% for the year, according to Reuters/Lipper. The average foreign stock fund was up 13.7%, helped by a slide in the dollar.
Could this be as good as it gets? A near-term pullback shouldn't surprise anybody after the surge of the last two months. But there are a few strong reasons why stocks' run may not be over:
•The big-money players call the shots in markets, and many who have been leery of jumping aboard the latest rally now are getting antsy. With less than two months to go in the year, money managers' focus will be on beating market benchmarks in 2010.
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