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The Market is at a New High… but the Economy is Not

We generally tend to think of the stock market and the economy as moving in tandem. But the disconnect of the past few years has shown that isn’t always the case.

The market has been clawing its way up since the low of 2009. Two weeks ago the Dow hit a record high…and has recovered over 125% since it bottomed four years ago. And last week the index cemented its longest winning streak since 1996.

But the economy hasn’t performed quite as well over the past four years.

On the upside, a bull market is an opportunity for investors to rebuild wealth. And rebuilding wealth rebuilds confidence. But the gains in the market haven’t managed to repair the damage done to American households during the financial crisis.

Household income is at the lowest level in a decade. In 2007, real (inflation adjusted) median income peaked at $54,489. As of 2011 (the most recent data available from the Census Bureau), it had fallen to $50,054…8% below the peak.

And as part of the economy, worker’s pay has been shrinking. Today, worker’s pay as a share of GDP is at a 50-year low. At the same time, corporate profits have soared: in the third quarter of last year, after-tax profits took the largest share of economic growth ever.

You wouldn’t think that a stagnant economy with lingering high unemployment would translate to new market highs and record corporate profits. But the reality is the market rally is driven by fumes from the Fed. As Jonathon Trugman for the New York Post put it, Fed Chairman Ben Bernanke is the matador in this bull market.

The Fed has been successful at juicing the stock market more so than the job market. And conditions remain weak enough to allow the Fed to keep printing money. And in the meantime, workers are still waiting for the economy to catch up.

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