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. Last Updated: 07/27/2016

Bullish Wall Street Appears Unstoppable




WASHINGTON -- Let Brazil's economy teeter on the brink of collapse or Federal Reserve Chairman Alan Greenspan fret anew about irrational exuberance. The American stock market will keep on flying higher. At least, that is the way it seems.


Brazil's sudden devaluation of its currency did cause a brief swoon in stock prices last week. But the market soon shook off worries that the global currency crisis was being reignited and made up the lost ground.


Similarly, Greenspan's most explicit comments in some time about the unsustainability of current high stock prices, given slumping corporate profits, caused barely a hiccup in the market Wednesday.


The Dow Jones industrial average actually rose by nearly 125 points after Greenspan appeared before a House of Representatives committee, although it did end the day off by a slight 19 points.


That reaction was a far cry from two years ago when Greenspan's musing about "irrational exuberance'' at a time when the Dow was nearly 3,000 points lower than today caused a big sell-off in the United States and around the world.


Economists, however, do not think the nation's most influential money man is losing his clout or that Greenspan's worries about the stock market are any less sound now than before.


The difference, they say, is that back in December 1996, before the global currency crisis struck, the worry among investors was that the Fed soon would start raising interest rates to cool off an overheated market. Greenspan's comments at that time were viewed as a clear warning of that possibility.


But everything in Greenspan's testimony Wednesday before the House Ways and Means Committee was seen as a confirmation of the current consensus view of analysts that the central bank is not contemplating any rate increases because of worries about the global economy.


"The Fed is on hold for a while,'' said Martin Regalia, chief economist at the U.S. Chamber of Commerce. "If the U.S. economy slows this year the way they expect it to, they may not do anything until 2000.''


Greenspan noted Wednesday the fragile nature of the current world situation, commenting specifically about Brazil's forced devaluation of its currency last week. He cited the possibility that Brazil's troubles could drag down other countries in Latin America - a region that buys 20 percent of U.S. exports - as a "potential downside risk for demand in the United States.''


Allen Sinai, chief global economist for Primark Decision Economics in New York, said Greenspan was acknowledging the considerable risks that still exist. "The mines are exploding all around the United States and the jury is still out on whether the U.S. economy can continue to make its way through the mine fields,'' he said.


But unlike last fall, when Greenspan saw the foreign threat as a big enough danger to engineer three interest rate cuts, the central bank now will be content to remain on the sidelines unless actual U.S. growth starts to slow too much, Sinai predicted.


"All of Greenspan's comments on Wednesday pointed to a steady-as-she-goes policy,'' he said.


While the Fed believes that a big rise in America's trade deficit will eventually slow U.S. growth, that slowdown has yet to occur. Instead, the economy grew at a sizzling pace in the final three months of the year, powered by robust consumer spending.


But Greenspan warned that consumer spending has been supported by the big rise in stock prices and "a decline in equity [stock] values, especially a severe one, could lead to a considerable weakening of consumer demand.''


The economy's strength, which pushed unemployment down to a three-decade low in 1998, would normally be causing the central bank to worry about possibly raising interest rates to make sure tight labor markets do not ignite inflationary pressures. But Greenspan said policy-makers continued to see no evidence that wage pressures were triggering price increases.


Supporting the view that interest-rate policy is likely to remain on hold, the Fed released its latest survey of the American economy Wednesday, noting that most regions were reporting solid economic growth. That review will be used by Fed policy-makers when they next meet to consider changing interest rates on Feb. 2 to 3.