Pricey stocks may yet head higher as uneven economic recovery maintains grip on U.S.

Three U.S. stock markets hit all-time highs this month, and the value of all global shares for the first time topped $100 trillion as investors bet on a post-pandemic return to normal in 2021. The stock price of rental marketplace Airbnb more than doubled Thursday, even as the Labor Department said nearly 1 million more Americans had applied for unemployment benefits, neatly capturing the tension between a bubbly stock market and grass-roots anguish.

“We’re in a euphoric, frothy kind of market,” said Liz Ann Sonders, chief investment strategist for Charles Schwab & Co. “Is there speculative fever? Absolutely.”

Yet the bull market may just be getting started. With the Federal Reserve planning to hold its benchmark lending rate near zero for at least three years, stocks are likely to remain attractive in comparison with bonds, according to investment strategists.

Soaring stocks would cheer millions of Americans. But rapid financial market gains amid a grinding labor market comeback could make it harder for President-elect Joe Biden to achieve his goal of building an economy that works “for all Americans.”

A rising market would mostly benefit the already affluent; only 14 percent of individuals in the bottom one-fifth of the income distribution own stocks, either directly or through retirement accounts, according to the Federal Reserve. An uninterrupted bull market also might erode support for government spending to help ailing businesses or the jobless, if some lawmakers interpret higher share prices as a sign of economic health.

“A huge amplifier of the inequality trifecta — of income, wealth and opportunity — the covid shock has pulled the Federal Reserve deeper into policies that are inadvertently worsening wealth disparities,” said Mohamed El-Erian, an economist and president of Queens’ College, Cambridge, in England.

As financially comfortable Americans grow richer, low-income service industry workers — disproportionately people of color — are likely to struggle to reclaim their jobs in hotels and restaurants. Such an uneven recovery threatens to exacerbate a rich-poor divide that Biden has vowed to narrow.

This summer, Biden called for legislation to add to the Fed’s existing twin mandate — providing full employment and stable prices — a focus on mitigating “persistent racial gaps in jobs, wages, and wealth.” That proposal, at least at first, is likely to be eclipsed by what many economists say is an urgent need for Congress to approve more aid for small businesses, the unemployed, and state and local governments.

“Relying on easy monetary policy will increase inequality. What we really need is fiscal policy to upgrade our workforce, generate good (high wage, high hour) jobs,” economist Megan Greene, a senior fellow at Harvard University’s Kennedy School of Government, said via email. “Central banks have fairly blunt tools, and monetary policy is a poor stand-in for these measures.”

The recent stock market gains also have raised alarms among global central banks and finance officials, who warn of risks to the financial system. From their March lows, the technology-rich Nasdaq index is up more than 80 percent and the Dow Jones industrial average has gained more than 60 percent, even as the recovery has sagged.

The stock market rally appears, for some, to be detached from economic reality.

The Bank of International Settlements, a global organization of central banks in Basel, Switzerland, said this month that “a certain amount of daylight” had opened up between companies’ high stock prices and their earnings prospects while the pandemic ravages major economies.

In November, the Fed said financial markets were vulnerable if the economic recovery or efforts to combat the coronavirus proved disappointing, echoing an earlier caution from the International Monetary Fund.

Only during a three-year period at the end of the 1990s technology bubble have stocks been pricier, based on the ratio of 10-year earnings to share prices. But with corporations and individuals sitting on enormous piles of cash, shares could be driven even higher.

Lofty stock values are defying significant health, economic and political risks. Nine months after the pandemic first disrupted American life, the United States is entering the most punishing phase of its encounter with the novel coronavirus.

“Probably for the next 60 to 90 days, we’re going to have more deaths per day than we had at 9/11 or we had at Pearl Harbor,” Robert Redfield, director of the Centers for Disease Control and Prevention, said Thursday during a Council on Foreign Relations event.

After this summer’s faster-than-expected economic rebound, the recovery in recent weeks has sputtered. November’s job growth was the weakest since spring, and lawmakers have not been able to agree on a new relief package.

The political climate is further complicated by the president’s attempt to overturn his loss in the Nov. 3 election and uncertainty over which party will control the Senate, a question that is to be settled in Georgia’s twin Jan. 5 runoffs.

Yet stock investors remain sanguine. One relative sentiment gauge maintained by the Chicago Board Options Exchange stands at its most bullish level in 23 years.

Over the past three months, more than one-third of the money that individual investors pumped into exchange traded funds went into stocks, making it the most popular single category, according to Arbor Data Science research.

Some individual stocks have done especially well. Shares of the electric-car maker Tesla have jumped more than 50 percent since the Nov. 17 announcement that it would join the S&P 500 this month. On Wednesday, shares of DoorDash, the meal delivery service, rose 86 percent in their first day of trading.

New investors have flocked to stock trading during the pandemic, at times overwhelming market infrastructure. Earlier in the week, two popular trading platforms — Interactive Brokers and Robinhood — suffered systems outages, leaving retail investors unable to access their accounts for hours.

On Wednesday, President Trump tweeted an all-caps celebration of the markets’ performance: “STOCK MARKETS AT NEW ALL TIME HIGHS!!!”

Based on standard historical measures, stocks are not inexpensive.

As of Dec. 1, the S&P 500 index — a broad market gauge — was valued at levels it has reached during only three periods in 140 years, according to a measure developed by Robert Shiller, a Yale University economist, which compares stock prices to a 10-year earnings average.

This cyclically adjusted price-to-earnings ratio often reaches a peak before stocks plummet. But a high reading doesn’t signal an imminent price decline, only lower stock returns over the next 10 years.

The tool, which Shiller introduced in 1988, may be outdated. An improved version, which takes account of low interest rates, suggests that stocks remain a better bet than bonds.

“Stock-market valuations may not be as absurd as some people think,” Shiller wrote in a recent article for Project Syndicate, a nonprofit media organization.

The case for a continued stock surge rests on global central bank policies, which have flooded markets with $7.5 trillion to offset the pandemic’s negative effects. In the United States, the Fed acted quickly in March to reduce borrowing costs for corporations and governments by buying large amounts of securities. Financial conditions now are the easiest in at least 30 years, according to a Goldman Sachs index.

As of June 30, U.S. companies held more than $2.5 trillion in cash, up 35 percent from one year earlier, according to S&P Global Ratings. Some companies, including home builder Toll Brothers and retailer AutoZone, have said they plan to use some of their surplus cash to repurchase their own shares, a maneuver that typically drives stock prices higher.

Likewise, individual investors have more than $4.3 trillion available in money market accounts, roughly $1 trillion more than they did last summer, according to the Investment Company Institute, an industry group.

“People are still sitting on cash, and global central banks are printing money,” said Michael Lewis, Barclays head of U.S. stock trading.

With interest rates low, alternatives to stocks are unappealing. Nearly $18 trillion in bonds are trading with negative yields — meaning investors who hold them to maturity will receive less money than they put in.

The last time stocks were this expensive, according to Shiller’s calculations, in the late 1990s, 10-year treasuries paid investors annual interest of around 5 percent. Today, those securities pay less than 1 percent, providing little competition for stocks.

“There’s no alternative,” said Meghan Shue, head of investment strategy for Wilmington Trust. “Investors are forced to go into stocks to get higher returns.”

High stock prices anticipate a strong recovery in 2021 as a coronavirus vaccine is widely distributed and workers and businesses gradually resume their pre-pandemic lives. Since profits typically rise faster than sales during recoveries, earnings for companies in the S&P 500 will rise 29 percent next year, Goldman said.

But to achieve that, they will first have to navigate what Biden has called “a very dark winter” of death and disease.

“It’s certainly a bit disconcerting,” Shue said. “But there may be a bit more to go.”

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