The short answer is-it’s complicated.
During the recession companies cut costs drastically, learning to do more with less. This increased their bottom line and as a result their share price.
But you can only cut costs so much before it results in diminishing returns.
You also have to increase sales and that second phase has occurred during the Dow’s incredible rebound from a low of 6500 in March 2009 to over 14,500 now.
The higher sales volume has been made possible by emerging economies of Countries like China and India.
Corporations are sitting on a lot of cash,which is obviously good for their balance sheet. Any debt that they have, has been manageable by record low interest rates.
That very low interest rate environment has created a default investment sector, meaning the money market investment sector in a near zero interest rate environment isn’t where investors are putting their savings. Another area where investors have traditionally sought higher returns is in real-estate, but that sector has been in the dumps until recently. Therefore the only place to put your money that makes any sense is in the stock market.
While they have been hoarding cash, this hasn’t lead to new hiring. The reasons cited are the uncertainty of the European Union Financial crisis and the impacts of the new Obamacare.
Therefore, the Nation’s unemployment rate has barely moved down from a staggeringly high 7.5%. This has been a jobless recovery.
Where people are benefiting from a higher stock market is in their pensions including 401k’s that are often tied with the Dow index.
But employment or lack thereof shows that overall Main Street hasn’t benefited from an improved Wall Street.
There is a disconnect, unlike past economic recoveries. Some of this can be traced to technology, where firms can eliminate redundant jobs, that computers, robots or outsourcing can do more efficiently.
We are even seeing the impacts of technology in the way shares are now traded by computers utilizing high frequency trades. The big institutions that can take advantage of speedy transactions has made the retail investor feel skittish about jumping in.
This is another big reason why an unemployment rate hovering at around 7% will be the new normal.