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Morici: Stronger Growth Needed to Sustain Bull Market

NEW YORK ( TheStreet) -- With the Dow Jones Industrial Average setting new records, it is important to recognize current stock prices are hardly extraordinary. Adjusted for inflation, stocks are still well below their January 2000 peak and may have a long way yet to run. Much stronger economic growth is needed to drive profits higher and sustain a bull market.

Stock prices are helped by the Federal Reserve's bond buying and thumb on interest rates, and by cash rich companies aggressively buying back stocks and boosting dividends. Simply, U.S. CEOs are flush with cash but don't have enough opportunities to invest in organic growth in a slow growing U.S. economy.

To date, corporate profits have been driven higher mostly by U.S. firms thinning employee ranks to accommodate slow growing domestic sales, and by big gains abroad -- about half of the profits of S&P 500 companies are earned outside the U.S.

Boosting worker productivity in slow growing markets has limits, and many companies may reach those in 2013. Repatriated foreign profits face stiff corporate taxes making future stock buy backs and boosting dividends more difficult.

In the end, a stronger U.S. economy is needed to sustain a bull market into 2014, and the fundamental competitiveness of the U.S. economy in global markets must be improved.

Consumer spending should strengthen with improvements in the housing market; however, reductions in federal spending and deficits and eventual Fed pull back from bond buying and higher mortgage rates policy portends only moderate growth in the combined contributions to aggregate demand from consumers, federal and state governments, and residential construction -- those ultimately drive the remaining component of demand, business investments in structures, equipment, software and the like.

Too many consumer dollars go abroad for Middle East oil and Chinese goods that do not return to buy U.S. exports. Thursday, the Commerce Department is expected to report the January deficit on international trade in goods and services was $43 billion -- about $500 billion annually.

Businesses, consequently, are pessimistic about future demand for U.S.-made goods and services. And bearing higher taxes, more burdensome regulations, and increased benefits costs mandated by Obama Care, they are reluctant to undertake major new investments in the U.S. and continue investing and hiring mostly abroad.
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