First thing, let's leave the debate over whether stocks are too high or too low or just right.
For the moment, let's not think about price-to-earnings ratios, earnings yield vs. bond yield, revenue growth, a technological revolution, sentiment measures or candlestick charting. Or, for that matter,
wins or hemlines or sunspots.
Let's just think about the sheer size of the U.S. equity market for a moment, the market capitalization of which weighs in at over $24 trillion dollars. More than four times the U.S. government debt. Better than twice the U.S. gross domestic product. More than the world gross domestic product. About 19 grand for every soul in China. You get the picture.
The market's growth over the last few years changes the calculus by which it has traditionally worked -- changes, in fact, what it fundamentally is. Consider: Historically, the stock market has worked as a giant discounting mechanism, a difference engine that weighs the views of thousands of participants on how things like growth, interest rates and the dollar will affect future prices. But, whereas it used to react to economic conditions, now it is of such a size that it exerts a gravitational pull on the economy itself.
This is the thing that seems to have gotten the
concerned. It is not so much that
thinks stocks are too high; it's that he worries total market capitalization has got so big that a steep move in either direction could seriously affect the economy. So if you look through his
testimony, which he will give again on Thursday, you can see that the Fed head doesn't say anything specific about stocks being overvalued.
But he does worry about the effect of stock market wealth on consumer spending. And he does say that asset gains need to come "into line with that of household incomes, thereby stemming the impetus to consumption relative to income that has come from rising wealth."
Household incomes gained a little less than 6% last year. In effect, Alan Greenspan just told us that if things go his way, you'd be better off in bonds.
There was some chatter in the market that ascribed Friday's selloff to the things said by Greenspan. But, why the drop didn't come the day before, when he actually gave the testimony, is something of a mystery. In any case, it will be a battered Wall Street that heads back to the office on Tuesday after the long weekend. At issue as much as anything the chairman said is the rupture in the market between tech stocks, which have been flying since the fall and the rest of the market, which has not. In the past week's excessive volatility, some see signs that that division is about to close.
"I expect we're going to tighten the gap between the
, and I'm not betting on the Composite coming down," said Art Hogan, chief market analyst at
. This puts Hogan in the optimists' camp. Others reckon the gap between tech and the rest of the market is going to close by tech falling -- there's an old saw on the Street about how when the generals get too far out in front of the army, the generals get shot.
Hogan thinks that's not the way it goes this way partially because all those non-tech stocks have fallen despite good profit growth.
"We've gone from Fed meeting to Fed meeting and ignored good earnings," he said. "I wouldn't be surprised to see double-digit returns for the Dow and S&P."
It doesn't look like there will be much news, at least of the scheduled variety, for investors to key off of in the coming week. There is a smattering of earnings, mostly from retailers whose fiscal years end in January. There are some second-tier economic data. Of those the preliminary fourth-quarter
report is probably the most important -- it will likely be revised higher from the advanced reports 5.8% growth.
The big focus will be Greenspan's second Humphrey-Hawkins testimony. In general, he gives the same speech before the
as he gave before the
, although the tenor of the question-and-answer session can always change.
"There's always the risk he delivers a slightly altered message," said Bill Sullivan, chief money market economist at
Morgan Stanley Dean Witter
. "Does he reinforce his message? Does he become more militant?"
Does he shoot the generals?