A lot has changed since the boom days that preceded the 2008 financial crisis, but two things remain surprisingly similar: corporate profits and stock prices.
Both have returned to record territory, which has been good news for investors. But their recovery has been so rapid and has benefited so much from the Federal Reserve’s intervention that it now poses a challenge: How to keep profits and stocks from sagging once the Fed begins slowly to temper its stimulus, possibly starting this week.
Stock prices and corporate profits stand out because most of the economic backdrop doesn’t look nearly as lush as it did back when the housing bubble was still inflating. The economy is growing again, but it is still limping. Unemployment remains high. The property market is far from recovered.
Stock prices and corporate profits, however, already have risen so fast that the pace of their gains is slowing. This is something that often happens when an economic recovery has been under way for several years; this one has been going since 2009. Something similar happened before the financial crisis, when stocks and corporate profits began running out of steam as the property bubble was deflating in 2007.
The real-estate boom was a big motor for stock gains last time around, but it is a sideshow today. This time, the Fed is a big motor for the market and worries focus on what will happen to stocks as that stimulus begins to shrink.
Making things worse, the Fed is getting ready ...