By Jeff Kearns
Dec. 17 (Bloomberg) -- The biggest stock market advance in seven decades is reducing the need for additional government stimulus measures, according to former Federal Reserve Chairman Alan Greenspan.
The Standard & Poor’s 500 Index’s 64 percent jump since March made Americans richer by restoring $5.4 trillion to U.S. equities and helped spur a 1.3 percent increase in retail sales last month, data compiled by Bloomberg and the Commerce Department show.
“The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that’s occurred since early March,” Greenspan, 83, said in a telephone interview yesterday from Washington. “Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent.”
Increasing spending beyond the $11.6 trillion already pledged may also be unnecessary because higher stocks will help boost profits and make loans easier to come by, Greenspan said. Earnings among S&P 500 companies are forecast to rise 65 percent in the fourth quarter, ending the longest series of declines since World War II, data compiled by Bloomberg show.
“When stock prices go up, the market value of common stock or of equity in banks and other financial institutions rises,” he said. “And the market value of liabilities is importantly affected by the size of the equity market value cushion on banks’ balance sheets.”
Wealth Effect
Net worth for U.S. households increased to $53.4 trillion in the third quarter, up $2.7 trillion from the prior period, helped by share gains, according to a Fed report released on Dec. 10. Assets in so-called defined contribution plans such as 401(k) retirement accounts and IRAs climbed 35 percent to $1.93 trillion from the first quarter to the third, the data show.
Retail spending rose in November at more than twice the 0.6 percent median estimate in a Bloomberg survey, Commerce Department data showed. The Reuters/University of Michigan index of consumer sentiment for December increased to 73.4 from 67.4 the month before.
“All of the statistical evidence indicates that the level of household wealth is a major factor in consumer expenditures and indeed apparently finances directly and indirectly about 15 percent of consumer outlays,” Greenspan said. “The impact on consumption expenditures is significant, largely because the amount of wealth is five times the level of income.”
Adding Liquidity
Greenspan ran the central bank from 1987 to 2006, a period in which the S&P 500 climbed more than sixfold, including dividends, according to data compiled by Bloomberg. He reduced interest rates to a half-century low of 1 percent in 2003 and didn’t raise them for a year, helping spur a 16 percent gain in home prices in 2004 and setting the stage for a housing-market collapse that led to more than $1.7 trillion in global bank losses and writedowns.
Fed policy makers pledged yesterday to keep their target rate for overnight loans between banks “exceptionally low” for an extended period after a two-day meeting in Washington. U.S. stocks erased most of their increase and 10-year Treasury yields rose on concern Chairman Ben S. Bernanke is preparing investors for higher interest rates next year after holding them near zero since December.
“Financial market conditions have become more supportive of economic growth,” policy makers wrote. Along with government actions, “market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability,” they said.
Mutual Funds
U.S. mutual funds are poised for their biggest gain since 2003, according to Morningstar Inc. data. Funds that invest in stocks returned an average 31 percent this year, according to the Chicago-based provider of investment research, after losing 39 percent last year.
“There’s no need for a second stimulus,” said Philip Orlando, who helps manage $392.3 billion as chief equity market strategist at Federated Investors Inc. in New York. “People feel better about themselves. They’ve had some of their lost money restored, and now they’re going to go out and spend some of it.”
Employers in the U.S. cut the fewest jobs in November since the recession began, and the unemployment rate unexpectedly fell, the Labor Department said on Dec. 4. Payrolls decreased by 11,000, compared with the median forecast for a 125,000 decline in a Bloomberg survey of economists, while the jobless rate dropped to 10 percent.
Ratings cuts by S&P on U.S. issuers have declined each quarter this year, falling to 145 downgrades in the current three-month period from 282 in the third quarter, 554 in the second and 756 in the first, Bloomberg data show. Three-hundred forty-two companies have been upgraded in the second half of the year, compared with 204 ratings increases in the first six months of 2009.
“Equity is there to cushion liabilities,” Greenspan said. “The greater the market value of equities, the greater the support for the liabilities, which means bond prices and their ratings go up.”
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
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