STEVE INSKEEP, HOST:
I don't mean to shock you, but I read a lot of newspapers, specifically newspaper apps, which I find a lot more informative than scrolling social media. One of the papers I follow is The Wall Street Journal, which has had compelling reports on the new administration and also recently had a headline about the stock market. The journal talked of, quote, "froth in the market." And the article worked through the evidence that the stock market, which is very high right now, is overvalued and so it could be heading for a drop.
David Wessel is director of the Hutchins Center at the Brookings Institution and is here for an assessment. David, Good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: I guess we should note you used to work for the Wall Street Journal. So what's the argument behind warnings that the market might be overvalued right now?
WESSEL: Well, let's be clear from the start, Steve. I don't know what the market's going to do. And if everybody thought the market was going to go down, stock prices would've already fallen. But those people, including my former colleagues at the Journal, point out that measures that compare stock prices to projected corporate profits - the most famous one is crafted by Nobel laureate Robert Shiller of Yale - are well above the historical average. In fact, they're higher than any time since the internet bubble burst in the early 2000s.
Secondly, until recently - and this changed recently - the stock market's rise was driven by a handful of tech stocks, like Nvidia, the chips maker. And the rest of the market wasn't doing as well.
Third, you have an alternative now. Three years ago, if you bought a 10-year Treasury bond, you only got 2% interest. Today, if you buy one, you get 4.5%. So some people think the risk of the stock market - not worth it 'cause you can get 4.5% guaranteed by the federal government.
And finally, there's a lot of uncertainty, largely driven by President Trump. What's he going to do on tariffs? Is he going to destroy the norms that have governed government? Is he going to lay off a lot of workers? There's an economic uncertainty index that a couple of academic economists keep track of using news reports and other things, and it has soared since the election. So you put all of those things together, and people say, hmm, it's more likely to go down than go up.
INSKEEP: OK, so interesting. Political instability, an alternative place to put your money, and the prices are getting way above the corporate earnings, the underlying earnings of the stocks. Are particular companies, then, driving the market and keeping it up?
WESSEL: Well, that was true. There was this group called the Magnificent 7, including some tech stocks, and they were responsible for a lot of the market's rise last year. But so far this year, other stocks have been going up as well.
INSKEEP: I suppose that that is true, although the Journal pointed out that some of these seem to be based on nothing - meme stocks and bitcoin and that sort of thing. But with all of that said, what is the case that bulls are making, meaning the people who think that the market's going up?
WESSEL: Well, Steve, I'm going to see your Wall Street Journal headline and raise you another.
INSKEEP: (Laughter) OK.
WESSEL: In December last year, not that long ago, the Wall Street Journal had a headline that says "History Shows No Link Between Nosebleed Valuations Like Today's And Next Year's Returns. Expensive Stocks Can Always Get Pricier." So the point is that history doesn't always give you the right answer.
Secondly, profits have been really surprisingly strong lately.
Third, there's this possibility that artificial intelligence is really going to give a big boost to productivity, which will allow us to be richer and companies to make more money.
And finally, some people think the Trump factor will be a plus for the stock market - lower taxes, less regulation - and that will offset the economic damage done by tariffs.
INSKEEP: OK. You've already given us a warning about history not being a prediction of - past performance is no guarantee of future results. But what does history say that might be informative here?
WESSEL: Well, I'd like to tell you a story. Back in 1999, Kevin Hassett, who's now head of President Trump's National Economic Council, published a book called "Dow 36000" - very upbeat about the stock market. At that time, the Dow Jones Industrial Average was about 10,000.
INSKEEP: Yeah.
WESSEL: Then came the bursting of the dot-com bubble, 9/11, the global financial crisis. It rose. It fell. Well, he was right. The stock market did finally hit 36,000 on the Dow Jones Industrial Average, but not until November 2023 - 24 years after the book came out.
INSKEEP: (Laughter) So if you just wait long enough, your prediction will come true. That's the lesson of the...
WESSEL: Absolutely.
INSKEEP: ...Story (laughter). I predict that David Wessel will be back with us again sometime. David, thanks so much.
WESSEL: You're welcome.
INSKEEP: He's with Brookings. Transcript provided by NPR, Copyright NPR.
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