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The real reason stocks rallied last year and could rise again in 2014

Daily Ticker

If you don’t follow the stock market closely, you might have missed it: a 30% gain in the S&P 500 in 2013—its best performance since 1997.

The “reaction was tempered,” writes Jesse Eisinger, senior reporter at ProPublica. “People know not to be excited.”

Having been burned by bubbles before—in tech (2000) and housing (2008)—investors know that the good times don’t last and that strong capital markets don’t necessarily reflect a strong economy, Eisinger tells The Daily Ticker.

Related: Stocks could plunge 50% in the next year or two: Blodget
The stock market “now indicates a very narrow world...and certainly has nothing to do with the overall economy,” says Eisinger. “Employment and vitality of wages is really what the economy is about.”

If that is the measure of the economy, it’s no wonder many people aren’t excited by the recent rally in stocks.

But there is a tight connection between the rally and public sentiment, according to Eisinger.

“Profit margins are coming at the expense of wages, which are under serious pressure," he says. "Stock prices are high because [companies] are producing high earnings, and the reason they’re producing high earnings is that companies have the ability to squeeze wages. That’s not good for the rest of us.”

The Economic Policy Institute reports that wages for most American workers have stagnated in the last decade.

Related: The Great Wage Debate: Should Companies Pay Workers More?

Eisinger doesn’t expect the tradeoff between wages and profits will change anytime soon.

“I don’t see any dynamic in American society that will shift the power from capital to labor...[or] put the squeeze on profit markets," he notes."In other words, the stock market can stay irrationally high for a long time.”

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